Perfectionism and Trading don’t Mix

We all know that the world isn’t perfect. 

Life isn’t perfect. Things go wrong, bad things happen, things grow, decay, die, blow up, dissolve, etc.

I believe that one of the keys to being unhappy, is to have high expectations of how things should be. 

If you have extremely high expectations, and the outside world or events don’t meet your expectations, you are guaranteed to be irritated and disappointed. 

When we try to force unrealistic expectations on the world, demanding perfection, we are sure to be disappointed.

The same applies to trading. 

If you are striving for perfection in trading…stop  

Trying to control and align the messy world of trading can lead to your downfall as a trader.

Consider trendlines…support and resistance.  If you are expecting a stock to turn right at an exact point on a chart line, and base your trading decisions on that exact line, good luck. 

If a stock dips a little bit below a support line, it doesn’t necessarily mean that support has been broken.  Remember, in a market there are buyers and sellers, a push and pull that is a messy and emotional process.  

The concept of trendlines and support and resistance though… is completely valid.  An author and trader that I like, Greg Morris, has interesting thoughts regarding lines on a chart.

Here he says:

I have often said that trendlines should be drawn with a crayon or large marker and not with a sharp point pen or pencil.  Over time, the effect of the trendline will fade, but we cannot measure it, so why not assume the trendline gets fatter over time. 

Humans aren’t perfect, the emotions of push and pull, of anchoring ourselves to a price of a stock…it’s all very messy.  The stock price action doesn’t have a mind of it’s own, it is the collective mind, the push and pull of supply and demand, created by emotional, rational and irrational players in the market.

He continues…

 If you agree that horizontal trendlines work well because of support and resistance created by supply and demand and supported (sic) by the heuristic called anchoring, then you probably will agree that there is an amount of time in which the anchoring affect and the supply demand support resistance effect slowly wears off.  I don’t think anyone can ever know the answer to this or why, but I suspect the dynamics of the market constantly offering so many other things to think about causes them to fade away, slowly for some, quickly for others.  

Another interesting idea.  The support and resistance line on a chart might fade and/or flex over time.  In a blog post, he provides the following chart:

  • Where does the breakout really occur?
  • Where is the resistance?
  • Is it at the very strict, straight line, or is it somewhere between the two dotted lines that grow wider over time? 

The point is…if you were to make buying and selling decisions based upon a thin chart, you might get faked out by a move that goes above or below, thinking the line has been violated, when in reality, it has not.

The market isn’t perfect, so don’t expect the movements of a price to obey some perfectly straight line.  Straight lines don’t existing in nature.   Since that is the case, don’t expect perfection on the charts that you trade.  

This is one of the reasons to trade small, use proper position sizing so you can give the trade some flexibility to “breathe”. 

The more rigid, the more precise and perfect your technical analysis, the more likely you are to be wrong!

Backtesting until your trading method is “perfect”

One of the best ways to lose money is to backtest things to death. 

Backtesting is very important to find out if your trading method or system actually has the potential to work, but there can be too much of a good thing. 

When trying to tweak a system, making it more and more perfect, you are likely making a huge mistake.  The end result of your perfectly optimized trading system is simply a perfect description of data you are backtesting! 

It does not mean that it is going to work in the future.

As a matter of fact, the optimizations that you have made, often by adding indicators, moving averages, etc. have created a complex set of signals that simply describes historical data. 

This is called Optimization Bias, which is describing what HAS HAPPENED, not what WILL HAPPEN.

Also, when you have this “perfect” system, with all of it’s attached bells and whistles, it is very hard to understand what might be going wrong when you start trading it.  When the system doesn’t work when you actually start to trade it, where would you logically go to understand why?  What would you change?  If you have 10+ criteria, which one should be removed, or changed?  What if you change the RSI from 35 to 40?

It isn’t simple.

It’s complex, so you don’t know where to begin to look and find what isn’t quite right. 

A system that has been over-optimized by backtesting, is is a perfectly rigid system, optimized to the max, unlikely to work in the real world 

The real world is messy and imperfect.

If you keep to a simple trading system, one that isn’t perfectly optimized to prior data, it is:

  • Easier to understand
  • More flexible to changing market conditions
  • Easier to find out why it might be working (or not working)
  • Easier to adjust

Taking a loss – An admission that you aren’t perfect

Let’s face it when we make trades, we are going to have losses.  That’s a fact.  It’s a part of the game.

After all, with trading, we are making educated guesses (bets), based upon prior activity and making strategic bets based upon our expectations of what might happen next.

A certain percentage of trades are going to be winners and a certain percentage are going to be losers.

If that is the case, why beat yourself up about a loss?  You know it is part of trading.  We aren’t perfect! 

Nobody can predict the future.  Nobody.

There was a great golfer in the first half of the 20th century named Walter Hagen.  He would tell himself before each round of golf started that there was going to be certain number of shots that would not go right.  He knew there would be shots where he was going to make a mistake.

And sure enough, when those events happened during his round, he didn’t care.  “Yep, there’s a bad shot right in the bunker”.  He didn’t get upset or angry, expecting each shot to be perfect. 

He just played on, calmly.

That’s true in golf, trading and life.  We can’t control everything.  To try to do that is insanity.

Hanging onto a losing trade is hating to admit that we are wrong, that we aren’t perfect.  

This is also how SMALL LOSSES turn into BIG LOSSES.

Not wanting to admit that we are wrong when a trade goes against us, often prevents a trader from taking a quick loss. 

So they hang on, hoping for it to go green. 

Then the trade goes further and further down.  Next thing you know, what could have been a small, inconsequential loss, has turned into an account busting trade that is devastating.

So stop trying to be perfect, take the small loss and move on… like Walter Hagen.

Waiting for the perfect entry (and exit)

Have you ever waited for a trade to setup so perfectly, where everything was exactly as you wanted, and then you enter…only to find out that you waited too long and most of the gains had already ocurred?

That happens to me and I’m sure it happens to you.  

Hindsight is 20/20 as they say. 

We draw our lines on our chart and overlay indicators and then look in the past on the chart to see how obvious how the buy and sell signals were. 

They weren’t so clear and perfect at the time though.

Trading doesn’t take place in the middle of a chart, it happens on right side (I wrote a post about exactly this problem – Trading on the Hard Right Edge.)

When we wait for the exact perfect time… when everything perfectly aligns in our favor, more often than not it is too late. 

Since nobody can predict the future, we have to take a leap of faith, go with the odds, and trust that we are making the best decision with the information we have at the time.

Perfectionists do the exact opposite, getting in at exactly the right time, which most likely is exactly the wrong time. 

When it feels perfect, and looks perfect…it’s probably not perfect.

Everyone seems to want to talk about the perfect entries…this signal or that signal. 

Fewer talk about exits. 

Still fewer talk about what is the most important aspect of trading…

  • Money management  
  • Risk management  

That’s what is the most important.  That is our insurance.  These are things that we can control.  Since the market we are trading is imperfect, messy and unpredictable we need to realize that we can’t control it.  It isn’t perfect.  We aren’t perfect.

But by managing your risk, you don’t need to have the perfect entry or exit. 

As long as your system has a positive expectancy and solid risk management, you can make it as a trader. 

It might not be perfect, but it works…and that’s all that counts.

Rather than striving to find the perfect entry signal or the perfect exit signal… in imperfect markets we need to focus on what we can control…how much to risk per trade.  

Your objective: Excel in the trading process, not perfectionism

Our goals as traders is to focus on trading our system and trade it well.  We need to focus on the process, not the outcome.  

Here are a few tips to overcome perfectionism in trading (and life in general):

  • Focus less on the outcome and more on enjoyment of the process.
  • Set more achievable goals
  • Understand that you are a competent trader, whether you are a win or lose on a particular day.
  • Learn from Walter Hagen: Sh*t happens, move on, continue doing what you were doing.  Play on.
  • Your goal should be to trade your system and trade it well, not focus on individual trades.

-Glenn

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