The Pathways to Increased Trading Performance: Part 2

The second in a series designed to show you paths to better trading success.

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Finding your best path in the markets.

In Part 1 we covered "Trading Bigger Size" and "Trading More Stock Simultaneously." Now we continue with Part 2.....

Path #3:  Change your time horizon*

*(3a Hold on to your Winners Longer & 3b Take Profits Quicker)

Pros:

Big(ger) returns.  You are sick and tired of getting out of a stock too early, and watching it keep going without you.  Holding on to your winners longer (say, using a more aggressive trailing stop strategy) can increase your trade performance quickly...of course this is assuming that your earlier winning trades actually kept going without you.

(Make sure this is the case, because if you were actually doing a good job of timing your exits, you will set yourself up for frustration).

No increase in BP required.  If you are increasing your returns by simply by changing your time horizon, you are not risking any more dollars, and don't need to have larger BP needs in your account.  You may not be adding to your overall monetary risk exposure either if your holds are simply increasing within the trading day.   Once you start extending your time horizon to overnight, however, you increase event/gap risk, which we will talk about in the next section.

Cons:

Time.  It takes longer for you to see results if you are holding for longer periods of time...duh.  Time will also allow for more inputs to come in and cause you to doubt your original trade thesis.

Event Risk.   I touched on this in the earlier paragraph.   If you now begin to hold stocks overnight, you expose yourself to Event and Gap risk.

 The stock(s) you are holding may have a negative earnings report or news item that can wipe away all your profits.  Gap risk can happen if the stock opens up the following day far away from its close and force you to get out far away from your intended stop/loss area.

Psychological damage.  It is really hard to watch a stock go from a nice winner to a scratch...or even worse a winner to a loser.

 It can really set you off and ruin mental approach and confidence going forward.

Pros:

Green on the Screen.   We've all heard the adage “you can't go broke by taking profits".  It's true.  Getting some good trades up on your blotter can really help your confidence.

Keeps you nimble.  Taking profits quicker can keep you nimble and have a fresh outlook for when market sentiment changes.  You may have less instances where you must reassess based on market climate changes and potentially doubt your holdings.

Cons:

High Commission Cost.   If you start taking smaller winners on your trades, you will likely start to increase your trading activity.  This will ramp up your commission costs, and during choppy markets it will eat away profits.

Leaving money on the table.  Take profits too early, and you can leave some real money on the table.  If you find yourself getting frustrated as you watch stocks you were in take off, this can lead to frustration, and a loss of confidence.

Performance Chasing /Overtrading. When you get frustrated watching would-be winners keep going, you can get into the habit of performance chasing and overtrading.  You see and hear about others capitalizing on larger moves and then feel that you need to start trading more to generate similar returns.

 This becomes a cycle that often ends up with you overtrading, and ignoring the disciplines that had you finding original success.

Path #4:  Increase Your Trade Winning Percentage

Pros:

No increase in Risk.   You are not trading bigger size or exposing your account.  You are simply trying to use better discipline to find more winners and fewer losers.

Reinforces good habits.  By focusing on optimal trade setups, you are reinforcing good trading habits which will help keep you out of trading slumps.

Less commission costs.  This can happen if you wind up scaling back your trading to focus on optimal setups and make sure that your trade win percentage goes up.

 Cut down on overtrading, and you cut your commission costs, which for some can really add up.

Cons:

Slow(er) growth.  Compared with the other three paths, increasing your trading win percentage is the path that takes a much softer angle of growth.  You won't necessarily see your P/L jump as fast.  In truth, this is a strategy best suited for more veteran traders looking to break a slump in order to improve their trading, rather than one for a trading looking for quickly accelerated P/L readings.

At the Mercy of the Market.    It may just be that the market is not offering setups that fit your criteria.  You are trying to be very disciplined and trade "A+" setups only, but they just don't seem to be happening.  You have to be okay with periods of inactivity while others keep trading.  Discipline continues to be very important.

There you have it.  The different ways to enhance your trading performance.  They all have the pros and cons, upsides and downsides.  In truth, every trader is different, and there is no easy answer as to which path is best to take.  Most traders try and succeed in all these areas, although not without some peaks and valleys along the way.

The best advice I can give to you is to approach each path with some caution, while respecting and fearing the market at all times.  If you can do this while being honest with yourself about your own style and mental makeup, you should be able to find the right path to enhancing your trading success.

Photo Credits: Getty Images/Chad Elhers/Photographer's Choice