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Bulkowski's Learn How to Trade Decisively

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As of 02/15/2019
  Industrials: 25,883 +443.86 +1.7%
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26,000 or 24,600 by 03/01/2019
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755 or 725 by 03/01/2019
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2,825 or 2,650 by 03/01/2019

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

Bruce C. Kramer wrote an interesting article for Technical Analysis of Stocks & Commodities magazine in the December 1995 issue, titled, "Trading Decisively." His title reminds me of the joke, "A day of firm decisions, or is it?" This is my version of his article.

Before we get to the article, here is an interesting twist. The name Bruce C. Kramer along with his 704 area code phone number (which accompanied the article) matches a man that committed suicide on February 25, 2009. After his death, it was discovered that he ran a $40 million Ponzi scheme for years. An article from the Associated Press said that in February 2009 his trading accounts held just $600,000, about 1% of what they were supposed to hold.

Trade Decisively: Keep It Real

A day trader I know keeps chanting, "All I want to do is make 10 cents per share." Some will tell you that setting a goal too low makes winning more difficult. The point is this: Keep your goals realistic. If you want to win 85% of the time, but research reveals your system wins just 60% of the time, you are going to be disappointed. That disappointment could cause you to abandon the system. If you want to hold positions for weeks to months, but your system gives trading signals almost daily, then you invite disaster.

Keep your expectations in line with the track record of your system. Knowing the limitations of your trading style and trading system is key to trading decisively.

Trade Decisively: Opportunity Cost

Deciding not to take a trade involves a cost, just as holding a losing position does. That price is called opportunity cost. It is the price you pay for missing out on a big winner. It is the price you pay for creating a bad habit, that of skipping trading signals. It is the cost of watching price drop, changing a winner into a loser, or a small loss into one even the government cannot bail you out of. When you chose to avoid taking your trading signals, then the chances of success diminish. You have to trade to make money.


Trade Decisively: Trading Inventory

Having confidence in yourself and your ability helps lead you to trade decisively. Achieving such confidence means...

  • Having a thorough knowledge of how your system works, its flaws and assets;
  • Knowing the behavior of the stocks you trade and the markets in which you trade them;
  • Not only creating but following a trading plan; and
  • Managing risk by following sensible money management rules.

A picture/cartoon of an egret with a long neck

A trading inventory also includes yourself. Enjoying sitting in front of the screen watching the price bars move up and down suggests you would like day trading. Being bored watching the ticks minute by minute or having your mind drift to more enjoyable endeavors suggests swing or position trading might be a better fit.

Building trading confidence includes the knowledge that on some days you should not trade, such as when you are angry. Anger can come from a losing streak, but also from fights with your spouse or anything else that ignites you before or during the trading day. Knowing when not to trade is a skill just as important as learning to follow your trading signals. Possessing that kind of trading knowledge helps build confidence and that leads to trading decisively.

Trade Decisively: Fear of Rejection

The fear of rejection creates a need to succeed. If we are successful, we will be liked. Who wants to hang out with a loser? The need to succeed and avoid rejection means we will avoid decisions that could cause a loss. Often that means finding an excuse not to trade. If you do not trade, you do not lose. Hence, you are a winner, but one that cannot enter a trade. And not trading means missing out on all of those winning trades, creating an opportunity cost.

The more you trade, the more losing trades you will have, and the more accustomed to taking a loss you will become. It shares a lot like eating chocolate for the first time. The mouth feel, the velvety texture thrilled you. But if you kept eating it, the sensation would become ordinary. You want the taking of a loss to feel ordinary, like adding in the cost of commissions. A loss is the cost of doing business and nothing more.


Trade Decisively: Trading Conditions

Perfect trading conditions rarely exist. If you wait for a dozen signals to agree before taking a trade, you will do a lot of watching instead of trading. Novice traders tend to pile on indicator on top of indicator, but pros use few. Pros understand that many indicators signal the same thing at nearly the same time. Many indicators do not add value. Your system tests will prove this to you. Do you really need three moving averages when two will work? Do you even need one? If price is trending upward, why do you need an x bar moving average to tell you price is rising?

Having a robust system developed from few indicators and few conditions means an optimum of flexibility. Exhaustive tests on your system will give you the confidence to know that it can handle almost anything Mr. Market throws at it. That confidence helps you obey the signals it issues, and that helps you trade decisively.

Know your tools and your trading system. Knowledge is power. That knowledge will tell you to keep expectations realistic. Unrealistic expectations means a higher opportunity cost when you watch winning trades go by. Acquire that knowledge by taking a personal inventory of yourself and your system. Know when it works and how well it works.

Recognize that when you are angry, your trading can suffer just as trading when you are too happy. Learning when not to trade is a discipline that needs honing, too. Thorough system testing will reveal how tolerant your system is to what the market can throw at it. You need to be flexible, too, having the patience to suffer a series of losses or draw downs before your system recovers. If you wait on the sidelines, you could miss one winning trade after another.

Trading decisively is a combination of all of these things.


Trade Decisively: Moods Make a Difference

When I was day trading, I discovered that when I was upset, I threw caution to the wind and traded everything, not caring how a trade performed. When I was joyful, like after a series of winning trades, I felt as if I was invincible and also took every trade.

If you trade often, you have probably experienced those same feelings. In other words, pay attention to your mood. No one says you have to trade today, so if your head is not screwed on right, then take the day off. Do something unusual, like return an overdue library book. A picnic is nice. At no additional charge, ants will be provided.

Learn to trade only in the proper frame of mind. That way, your decisions will not be colored by your feelings. You will be better able to trade decisively and successfully.

A picture my dog wearing glasses

Trade Decisively: Accept Ambivalence

If you are contemplating a trade, you may have mixed feelings about it. Some indicators will signal a buy and others a sale. When you make a trading decision, though, such ambivalence and self-doubt should disappear. If you trade often enough, ambivalence will also fade from being an issue. Experience teaches you that.

After your trading day ends, you may want to continue practicing so that each trade becomes rote. To trade decisively, push aside any feelings of ambivalence and make a decision to trade or not.

I read about one trader that instead of stopping trading, she cut her position size to almost 0. That way, even though she knew the trade was going to be a losing one, she did not let her emotions dictate how she traded. She just kept pitching, knowing that in time her system would begin working again.


Trade Decisively: Insecurity and Anxiety

Insecurity and anxiety stem from not knowing your trading system well enough. If testing revealed that the maximum draw down was 25% before a recovery and the current trade is down 15%, you should feel confident that the trade will recover. Knowing how your system behaves and trading it often enough will reduce the insecurity and anxiety that accompany trades when they begin to go bad.

Trade Decisively: Commitment, Investment and Involvement

How many times has your spouse or significant other asked you to accompany them on an outing, saying "You'll have fun!" After the event is over, you discover that they were right. That is an example of becoming interested after involvement. If you don't try something, you won't know if you like it or not. "Successful decision making requires commitment to the decision as well as interest and involvement in the endeavor," writes Kramer.

Successful trading requires a commitment to learn how to trade and to actually do it. Practicing it on paper or simulating it online are wonderful, but they are not substitutes for actually trading. If you make a commitment in time and money to learn how to trade, then do it. Make some trades to see if the lifestyle and income are right for you.

Trading decisively means having a commitment to the process, to treat each trade as a new opportunity to hone your skills and achieve your goals.

Boy is this a load of crap.

Trade Decisively: Ignore Everything

If you have spent time developing a system and it issues a signal, should you care that the talking heads on your television are saying the world is going to end? Learn to block out all that distracts you from making an informed trading decision. Concentrate on the trade in progress.

Beginning traders soon learn to monitor only a few securities at a time because they cannot handle more than that. Once they become an expert in how those securities behave, then they can add additional indicators or securities to the mix. Does trading have to be more complicated than saying, "If the RSI drops below 70 then I will sell. When it rises above 20, then I will buy?"

When your concentration is interrupted by extraneous thoughts or distractions, then trading decisively becomes more difficult. It reminds me of Kevin Costner saying "Clear the mechanism" in the movie, For Love of the Game. He played Billy Chapel as a pitcher in a game with no hits against him. His ability to clear away the crowd noises, ignore the pain in his shoulder, and just focus on throwing the next pitch allowed him to experience his best game ever.

Like Billy Chapel, traders need to have that kind of dedicated concentration.


Trade Decisively: Delayed Gratification

At first I found it difficult to understand how delayed gratification leads to trading decisively. Kramer explains that there are two aspects to delayed gratification. The first is to know your system thoroughly before trading it. Put in the hours to learn how your trading system behaves in all market situations that you are likely to encounter. Knowing your system thoroughly will give you the confidence to trade it successfully.

The second aspect is to follow the signals of your system. Now that you have put in the hours necessary to develop and understand your system, you might as well follow it. Having the confidence to know that not every signal will be a winning one, but over time, the profits will accumulate. Your testing proved that. Believing that your system works will allow you to trade decisively, without hesitation.

Having suffered through the five hours it took to write this article, let me leave you with one anecdote.

Linda, a financial consultant I know, has an amazing ability to pull the trigger without hesitation, that is, to trade decisively. I wrote her an email saying that a utility stock she had bought had just cut their dividend. What did she do? When the market opened, she sold it above 26 (down from 32 the day before), but well above the low of 19 and change. She saved her clients almost 27% by trading decisively. Experience has taught her to cut losses without a second thought, and to relax while the profits accumulate when a trade goes her way. She is an inspiration.

When a trade goes against me, I just picture Linda owning the same stock. What would she do?

-- Thomas Bulkowski


See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. The worse your line is tangled, the better the fishing around you.