This article is the first in a series of three where I will raise the questions of where have you been with your trading, where would you like to be, and what are you willing to do to become a better trader.

In recent articles, we have looked at some issues relating to risk and to some of the psychological factors involved in trading. We have seen a market that crashed and we have seen a sharp rally. I find it interesting that I was receiving quite a large number of inquiries about my coaching sessions as the market was falling, but not nearly as many during the rise. The calls were often from prospective new clients who reported large losses and were looking for ways to stop the bleeding and to attempt to regain lost ground. Sadly, steep losses had already occurred before help was sought. It seems clear that less help is sought as markets move up, but one wonders whether that is a symptom of the old condition of confusing brains with a bull market.

The fact that we have seen an upturn in the market following the March lows certainly does not mean that it can't turn back down. The question is whether the trader knows how to protect himself in the event of another decline or whether he has already forgotten his recent pain. Hopefully, it is the former and the trader has taken steps to understand ways to cut losses, hedge positions, or even insure a portfolio.

No matter who we may be or where we are in our trading, I would suggest it is a valuable exercise to take a personal inventory about our approach to trading and make an evaluation of how well or poorly it has served us. Some of the folks to whom I have spoken told me that they just threw away their account statements unopened because they knew they would be bad. While I can sympathize with their feelings, I don't see how this "ostrich approach" can be helpful. In a sharply declining market, that approach does nothing to cut losses nor does it assist in learning ways to profit from downward moves. Others have simply pulled out of the market either because they have abandoned hope or to cut losses and await the next bullish move. Finally, a small few have had great success.

Now is as good a time as any to recognize where you fall on the spectrum of trading. Did you throw away your statements or did you have exit strategies in place that saved the bacon? Did you know what to do and when to do it or did you just hang on for dear life hoping "it'll come back?" At this point, whatever you did or didn't do can teach important lessons for the future.

Self-evaluation may help avoid costly errors in the future and may help even the most successful improve their trading. I would suggest that each of us look at positions we have entered and/or exited in the last year and a half and try to recognize why we entered a play, ascertain whether we had planned the trade before we entered it and if so whether we followed our plan, and determine what strategy were we attempting to use and ask ourselves whether we actually followed through with our strategy. Did we succumb to the "little voice in our heads" saying something like: "I'll just let it go down another 50 cents before I get out." Did we get out then or did we let it go even farther down? We need to analyze why we made those decisions. Was it a fear of losing? Did we give up because we just didn't know what to do? Did we stay in positions because we consider ourselves to be buy and hold investors? Precisely what led to our decisions or indecisions.

In trading, as in many things in life, it is important in determining where we are going to know where we have been and what influenced or controlled our decisions. The introspection can be extremely helpful in heading us or keeping us in the right direction. If I can understand my behavior with respect to a trade or to my trading in general, I am armed with ammunition that can help me become better than I have been in the past. Failure to come to such an understanding can easily result in repeating the same performance. As has been said, "The definition of insanity is repeating the same thing over and over and expecting a different result."

Good Trading!
Bill Kraft

April 18, 2009

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