The Compulsive Impulsive
We are all familiar with the stereotype of the compulsive
trader. Traders who are compulsively looking for trading
thrills, while telling themselves they are doing it to
make a profit.
The rush of adrenalin that comes from making the "big" trade and then watching
to see if it is followed by a "big" win.
It is not so different from betting at the race track.
It is far removed from what is required for successful
Compulsive impulsive market timers take trades because of emotional responses
to news events, market rallies, or market sell offs, because they "feel" they
know what is going to happen next in the markets.
They take trades not because the trade is required, but for the thrill of the
trade itself. All risk controls are ignored, no logical trading strategy is
followed, and no exit strategy is prepared ahead of time.
Of course anyone can act impulsively at times. But in the investing world,
impulsive trades are almost always losing trades. And compulsive impulsive
trading, can lead to outright ruin.
An interesting test was run to measure a person's impulsive tendencies:
Participants were asked to decide between taking an immediate, small monetary
reward (that is, $200 right now) or a larger reward given later, $500 in six
Impulsive people tended to take the smaller, immediate reward. They have difficulty
delaying gratification. They can't wait for the larger reward. They want what
they can get as soon as possible.
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Even disciplined people can act impulsively when the
conditions are right.
There is little harm in impulsively going for a latte instead of your usual morning
coffee, black with two equals.
Yet while some impulsive decisions may have little effect on one's life, impulsive
decisions when trading the stock market can have major negative consequences.
Trading (market timing) requires that investors clamp down on emotional impulsive
behavior. Market timing is possibly "the" perfect example of unemotional, non-compulsive
and non-impulsive planning. Timers look far ahead in time, planning for gains
that may not be realized for months. If in cash during a bear market, actual
profits may be postponed years.
Instant gratification is the exact opposite of what market timers must expect.
Those who think that long term buy-and-hold investors hold the edge in long term
planning are not correct. It is market timers, following a plan that takes years
to unfold but offering gains far in excess of a simple buy-and-hold, who have
the real long term strategy.
Compulsive traders will have great difficulty being successful (profitable) market
timers. Market timing is the non-compulsive execution of a planned strategy,
that can only be successful over time.
Impulsive traders will have great difficulty being successful (profitable) market
timers. Market timing requires adherence to a trading strategy that requires
trading not when you feel the urge, but only at specific points in time when
your trading strategy tells you to do so.
Compulsive impulsive personalities face many difficulties. But in investing,
be sure to hold those impulses at bay if you want to successfully beat the markets.
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.