"Keep Yo-Yo Trading Out of Your Game"
By Alan Farley
Special to RealMoney.com
2/12/2004 12:00 PM EST
"There are three types of traders in this world: winners, losers and yo-yos. It doesn't take much effort to comprehend the virtues of winning or the liabilities of losing, but what exactly constitutes a yo-yo trader? Quite simply, these people know how to make money and lose it -- sometimes all in the same day.
Yo-yos comprise such a large part of the population, they may represent the silent majority of the markets. The affliction is simple to understand. Many traders develop enough skills to put on profitable positions with relative ease. But these same folks also play the stinkers, paying the price with substantial losses.
In this scenario, there's enough positive reinforcement to keep them in the game for years, but not enough profit to make a dent on their bottom lines. Two very different profiles emerge for these yo-yo traders: The first type grinds through mediocre results on a daily basis, hoping that lightning will eventually strike. The second type shows profitable results over longer periods, only to lose it all in a slew of bad trades.
Imperfect Strategies
Two major flaws make for yo-yo results. First, the afflicted traders lack effective risk-control techniques. This makes them act inappropriately, or not at all, when positions move against them. Unfortunately, they've been bailed out enough times to believe their positions will come back in their favor. But the math doesn't add up over time, and their bad habits come back to haunt them.
The second flaw reveals a far deeper challenge to long-term survival. Their equity growth actually tracks the market and looks like an index chart. In other words, these yo-yo traders make money when the broad market is rising and then lose it when it falls. This is a tough proposition because the secret to long-term success is keeping your winnings through all kinds of markets.
This major defect exposes a bull market mentality that fails during pullbacks, corrections, and every downdraft hit during a typical market week. Alas, it's also how most traders play the market these days. Unconsciously, they give legitimacy solely to rising markets and assume all other trading environments are aberrations. This mental mistake was the primary reason so much money was lost after the March 2000 top.
Even seasoned traders are vulnerable to this flawed mentality. The narcotic of rising markets causes them to limit their efforts to the momentum chase, rather than building strategies based on broad cycles and a respect for risk. When the market fails to offer perfect conditions for their tactics, they forget the only sensible path is to stand aside and wait.
Most traders lack discipline in adverse markets and try to force the tape to their will, often with very bad results. Or their restless minds fill in the missing pieces and see patterns or opportunities that don't exist. This combination of wishful thinking and aggressive overtrading triggers sobering losses until the trader finally awakens to reality.
The yo-yo mentality can end careers in other ways as well. The daily demands of this game are so intense that borderline participants just get lazy and develop a self-destructive style. Fatigue then sets in as the mind struggles to organize shifting markets, forcing many shades of gray to resolve into black and white. This causes positions to become all-or-nothing affairs, with wish fulfillment distorting incoming signals.
Change in Attitude
Traders afflicted by yo-yo disease need to face the harsh facts. They came into this game wanting to take money out of the markets. But the endless cycle of winning and losing means they're stuck on a treadmill and going nowhere in a hurry. Without a major change in attitude and technique, yo-yo traders are doomed to failure.
Transforming from a yo-yo into a winning trader is far more difficult than the transition from a loser into an occasional winner. In fact, the door to consistent profitability is locked so tightly that few market participants ever cross over into this financial nirvana. But when they do, each success story carries a common thread.
Consistent profit requires standing against the restless crowd. This demands a level of courage that most market aspirants cannot achieve. Start building this skill early in your career and practice it at every opportunity. Cut your losses quickly and learn from mental mistakes, bad decisions and lousy executions. And don't trade when personal problems use up time or physical energy.
Breaking the yo-yo habit also requires a little well-stated Zen philosophy. It goes something like this: Before enlightenment, chopping wood and carrying water. After enlightenment, chopping wood and carrying water.
Intelligent people learn many skills during their lives and trading mastery is like any other discipline, only a lot harder. The individuals who finally cross over find an unexpected world. Their excitement fades and the game becomes like any other serious-minded profession. In other words, successful traders enjoy their power but treat the market as a business -- nothing more and nothing less. "
(in
www.realmoney.com)
Enviado: 13/2/2004 0:17
