THE MOST DIFFICULT part of trading isn’t picking stocks, taking losses or even dealing with the IRS. Without question, the toughest part of managing money is knowing when to sit tight — then actually being able to pull it off.
In this game, less is often more. I don’t care how cheap the commission rate is. Trading isn’t like sit-ups: You can’t just do a few extra reps and expect to get a better result. Indeed, in any number of situations, the best move to make is no move at all.
Yet doing nothing is harder than it looks. There’s something about money flying around that prompts an inescapable, almost chemical urge to act — to buy, to sell, to short, to cover, to write options — whether you actually need to or not. And it’s that unfortunate, almost druglike instinct that prompts many to hang themselves with foolish decisions right from the start. Yep, trading is easy; it’s the sitting tight that’s really tough.
Let’s say you did the research, bought a stock and, low and behold, find yourself with a winner on your hands. You jumped into XYZ at $30, and now it’s trading a solid five points higher. Human nature, with which we all must contend, prompts you to sell the stock, grab the profit and move on to another name. It’s a self-destructive instinct that disciplined traders know how to squelch. (more…)
