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How well do you know your portfolio?

-Sargon Elias, general manager, CMC Markets

Monday 24th September 2007

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Have you ever noticed what an absolute pleasure it is to keep your trading records when everything is going wonderfully for you in the market? It's just like counting a monetary judgment of what a fantastic trader you are.

After all, how else can a trader judge themselves if not by how much money they have made from their trading activity? The problem for most people though is that good record keeping goes right out the window when you start taking some losses. For so many market participants, the automatic defence mechanism is to bury your head straight in the sand and try not to think about the bad trades that you have suffered. If any of us behave like this though it really doesn't speak very highly about our chances of being a long term survivor in the market.

Naturally enough, any trader wants to focus on their wins and try to delete the losses from their memory. This task becomes even easier if we also cease updating our trading records when you are going through a bit of a rough patch. If you behave like this then it really demonstrates a high degree of uncertainty about the sustainability of your trading plan. Traders who are confident that their activities in the market will be profitable over time tend to be fairly unconcerned about losses (even a string of them) in the short term. The reason is that they have enough courage in their convictions that their planning and management strategies will be profitable over time.

I would suggest that it would be quite reasonable to focus your attention much more on your losses than your profits after the positions have been closed. Your profitable trades tell you what you have done right. Of course there may be improvements that can be made but essentially these are the times that you were right. On the other hand, your losing trades give you an indication of when you did something wrong - so they give you the best opportunity to work out what most needs changing within your trading plan.

As an example, if you like trading ascending triangles for instance, yet you seem to lose money trading them as often as you make it, then perhaps you need to take a look at your pattern recognition skills. Or maybe you aren't waiting for the breakout to properly occur. Regardless of the cause, you need to identify what it is so that you can take action accordingly.

If you ignore your trading problems then they will never go away. If you address them, your trading can improve and you will get more of those great feeling of well being that goes hand in hand with making profitable trades.

Along these same lines, you need to consider the emotions that effect you in terms of your winning and your losing. I mentioned previously that you want to increase your winners to increase your overall feeling of wellbeing. It is important though that you don't get carried away with celebrating your winners.

Regardless of how well you refine your trading technique you are always going to have losing trades. I am of the opinion that if you get too excited about your winning trades then the inevitable losing trades will have the same impact on you - except of course this effect will be in an inverse fashion.

With this in mind, I suggest that you try and keep yourself as emotionally neutral as you can at all times. Neutral when you win and neutral when you lose. This way, although you don't get to savor the wonderful emotional highs, you can lessen the lament of emotional lows. If you can do this, it allows you to keep yourself more focused on the job at hand - making winning trades. The more emotional baggage that you cart around with you the harder it becomes to focus on doing this because you are frequently left dumbstruck by the losing trades that we have already established are impossible to avoid.

As we can see, we need to be constantly monitoring where we are making money and where we are losing money. It is completely acceptable to lose money on some trades that you make. It is futile to try and eliminate losses from your trading portfolio altogether though. What isn't acceptable though is taking losses resulting from the same mistakes over and over again. Every trader needs to be able to take a very objective point of view of their own trading. If you can't confess to mistakes that you have made to yourself and then avoid making them repeatedly, then what hope do you have of improving the returns that you generate from trading?

*Sargon Elias is general manager of CMC Markets New Zealand, an online trading company that is the largest share, index, sector and margin FX CFD provider in New Zealand. CMC Markets is a global leader in financial trading with offices on four continents, providing clients in more than 100 countries with 24-hour online access to 18 international markets.

CMC Markets launched the world's first online, realtime Foreign Exchange trading platform in 1996 and in January 2000 it became the first company to offer online commission-free Contracts for Difference (CFDs). This started a revolution in trading around the world.

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