Resting orders, trading plans, and intuition/fear signal crossing.

This originally appeared Dec 2010, updated below. 

I had a nice email exchange over the past week. Originally we had talked about pulling the trigger, I asked him to send me his trading plan. In addition he asked me my opinion on resting orders.

A plan is only as effective as your ability to except the consequences of following it. I am a fan of resting orders but also use market orders. When your brain catches up with the speed of the market, I think market orders have an advantage. You are giving up a tick every time you go to the market but it guarantees a fill.

You said something that can be really dangerous. “I often hesitate as price approaches and miss the price I was planning for. Happened this morning and was very frustrating.” The “frustration” can be caused by not following your plan. If it is because of the plan, your eyes are in the right place already. Talking to you before, I believe you are thinking about it in terms of loss money. Show me the math on that, prove it to me as a fact that pulling your order effected anything. Think about the time it saved you money and the time it cost you money. You are thinking about it in terms of the money you could have made. It is important for you to have facts because what often happens is your perception is so completely different than reality when it comes to money.

There is a reason you pulled that order. Fear or intuition? Fear is a problem that takes a while longer to fix. Intuition and fear signals can get crossed up. You are going to have some discomfort but it should not be so much that it takes your focus away from the trade. Intuition is good when it prevents you from taking a trade.

This is one trade in series of trades it is not important, but you will use the tools and signals over and over again. Focus on that.

And this is what the trader wrote back to me.

I think my fear and intuition signals are getting crossed like you said. I have recognized the fear as mostly irrational. It is rare for me to enter a trade and have the market run away and stop me out without a chance to adjust. But this fear is the cause of hesitating.

Most of the actions/habits that I have changed in trading or in life for that matter, have been because I finally got tired of the same results. Before I got an account I would place a trades through my mentors. I had moderate success. When I finally got my own account, I had some confidence. I did not realize what I was doing was completely different. Making a trade every other day is much different than scalping. I got lucky the first day and that luck caught up to me the next day. I did not take a trade for the rest of week. Eventually I was tired of seeing trades work out.

The fear of taking a trade became more painful than the fear of missing another opportunity. Fear is often irrational, but knowing that does not solve the problem. Preparation and talking or writing it down has always helped me. Force yourself to look at it from a different view. Look at it from the view of the adviser not the advisee. Remember, the first step is the hardest.

Disclosure: If you are going to risk money, make sure it is not money you need to live.

Update: Two things stand out about this post. The reason we all seek advice is that we either; want support or we want to simplify the situation.

Support comes in the form of seeing if we are the only ones with this problem.  Setting up as an example that it is possible to overcome whatever obstacle and hopefully provide a roadmap.  This is huge, we all need some type of role model.

Advice is easy to give because it is clean.  There is no emotional baggage and no consequences to the person giving the advice. If the trader had failed, I wouldn’t have had to talk to his wife or children.  I didn’t know what it was like the last time he had to tell his wife they had to dip into their savings. Mr. Viskanta of Abnormal Returns recently wrote a post “On the immorality of stake free forecasts“.  Obviously it is immoral if you intentionally hurt someone.. But generally stake free forecast and advice in general is asked because it is just that, stake free.  The person seeking the advice should understand the context. Caveat emptor.

The second thing that stuck out for me is this line:

The fear of taking a trade became more painful than the fear of missing another opportunity.

There is truth to this but what a sophomoric way to approach life, such a waste.  It shows a lack of focus and a complete lack of intention.  Yes we fall off and have fears and actions have consequences and all that stuff.  But waiting until you reach your bottom to act?  Very embarrassing sentence.

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