Ask Colin

I have been trading shares 10 years and futures for about 4 years. When I started in the futures market I lost a lot of money listening to the broker so I stopped trading and built my own methods on trading the futures. Now I have this mental problem on being able to push the buttons thinking maybe this is the wrong one take the next so on so on.

If it helps, you are far from being alone with this problem. Most people start off having some degree of problem being able to "pull the trigger", as they say in the industry. Some people get over it fairly quickly, others take longer and some always find it difficult.

Advising you properly about this probably requires a trained psychologist, however, I can offer some thoughts from my experience.

My first thought is that it is not a bad thing in a way. The people who are the greatest danger to themselves in the market are the ones with no fear. They always end up over trading and lose a lot of money. So, having some degree of caution in your makeup is a sign that you have learned from experience in the market and in life. However, it is not a good thing to be so cautious that you never take a risk.

My next thought is about risk and follows on from the previous paragraph. When you look at it in the abstract, theoretical way, profits (and losses, of course) are made by assuming risk. If there was no risk, everyone else would already have arbitraged away whatever profit opportunity there was. So, the nature of trading is that you assume risk. The key to success is in recognising the risk and managing it sensibly.

The way we manage risk sensibly is a big subject. However the three key techniques are

1. Market exposure - limit the total amount of your trading funds that are exposed to risk at any one time in inverse proportion to the level of market risk you perceive. So, when market risk is high, you have a lower proportion of your funds in the market.

2. Diversification - you spread your invested funds out over several positions, so that failure of one investment is not catastrophic to your portfolio.

3. Position risk - you limit the percentage of your trading account that is risked on any one trade.

The way I trade is that I have developed a trading plan that deals with all the risks that I see in trading. I have strategies for the key architecture of my plan and tactics for how I manage trades. I know this plan works in the medium to long term, because I have tested it thoroughly. This gives me confidence that it will work, even if there are short term periods where it does not work so well.

Having a plan like this makes decision making much easier. I have a clear framework for decisions. I find that most people who have trouble making trading decisions do not have a clear plan of what they are trying to do and how. So, everything is a big area of doubt, with which they wrestle constantly.

Now, it takes time to develop such a plan, but it is what all successful traders eventually do. There are many successful trading plans.

It is also very important to understand that trading involves losses. There is no "perfect" method to trade, where every trade is a winner. The key is only assuming reasonable risks and managing them sensibly.

The other problem some people have is that they try to follow a plan that is somehow in conflict with their attitudes, beliefs and tolerance for risk. They will continue to sabotage themselves in unconscious and subtle ways. I wonder from your question whether you might not be made up such that you are more comfortable with shares. If you have done that for 10 years, presumably you have something that works. maybe the 4 year struggle with futures is trying to tell you that it is not the game for you.

Finally, I detected a subtle thought when you said you lost money listening to a broker. There are several things here:

1. We must all take responsibility for our trades. If a broker, or anyone else, suggests something, they are not taking responsibility for it being right for you. The trade will not be done unless you say to the broker that you want to place the order. At that point you must own the decision. The broker's advice is only one input to that decision.

2. Listening to the broker could not have been the reason you lost lots of money. You only lose lots of money if your money management is deficient in some way. This comes back to the trading plan. Losses are the result of unsuccessful management of risk.

3. Many investors and traders misunderstand what a broker's role is. It is clearest in a discount broking situation - he or she does executions for you. In a full service broking situation, the broker is selling you his or her wider service. A broker is a middleman. The broker makes money by transacting business for you. The more business you transact, the more the broker makes. Everything the broker says to you or does for you is by way of facilitating your doing business through him or her. I often joke that broker is spelled b-r-o-k-e-r, but pronounced "salesman". If a broker was a brilliant trader, he or she would not be working as a client adviser. This is not to say you can not get good advice from a broker, but you must understand what is going on and assess the inputs you get from the broker yourself.

I hope these thoughts are of use in your trading and investing.



Keywords: