The Trader's U E-Letter: Issue # 185
Wednesday, April 26, 2006
How Often To Track Your Investments: Every 15 Seconds… Or Years?
by D.R. Barton, Jr., Chairman, Trader's U
"The future belongs to him who knows how to wait" - Russian Proverb
My good friend Brad Martin has been a floor trader for 14 years at the Chicago Mercantile Exchange and Chicago Board of Trade. And he's one of the best traders that I know.
"I always put on one more trade than I can comfortably manage," he once said. And he told me about one of his tactics for letting his trades run their course, instead of letting himself get jittery and take a trade off every time it made or lost a little money.
I have found that in trading and investing, micromanaging a trade in progress is usually a bad idea.
On the flip side of that coin, a "hands-off" approach can be even worse. It's not uncommon for folks to have a trade or investment go against them and then, instead of taking action, completely ignore the trade. They end up wishing and hoping that things will get better. Call it the "ostrich syndrome" - putting one's head in the proverbial sand.
What is the right frequency with which to track your investments? The answer depends on several factors, but it's clear that too much and too little - the polar extremes - can both be bad. Let's look at a couple of issues we must all deal with when deciding how much time we should spend monitoring trades.
Don't Ignore A Struggling Investment
Do you stick your head in the sand? To be honest, I've never once heard anyone say, "My trade is going so well, I've quit looking at it all together." When a trade is going our way, we tend to check it every day or every hour or every minute. It's exciting to have a nice winner.
Contrast this with a trade that's not working. Many people just ignore it. And if you don't have your stops in place, this can lead to disaster. I know more than one trader who has had day trades turn into long-term buy-and-hold losers because they stuck their head in sand when things went bad.
Do You Micromanage Your Investments?
Many folks tend to look at their investments far too often, whether they are going well or going poorly. If you have a long-term position in your IRA account, and you track it every day, chances are that two things are going to happen. First, you'll drive yourself crazy worrying about meaningless daily gyrations.
And second, you'll allow those daily gyrations to influence you to take action when you should be letting the trade or investment work. The same can be said for any time frame; swing traders who hold their trades for several days should not be checking the prices every 15 minutes. And day traders should not be watching tick-by-tick data unless their strategy requires it. Set your stops and profit-taking exits and let the trade work.
Finding the right balance of when to monitor your trade and when to sit back and let it work is one of the keys to cutting losses short and letting profits run.
Find out what works for you by checking your stress level. Are you constantly on edge about your trades? Maybe you're monitoring too often. You may even find it useful to add a section on monitoring criteria and time frames to your trading plan.
In the end, here's an axiom that may prove useful: Don't do any monitoring unless it's needed to take action. That should help to keep your profits running and your stress level low.
Today's Trader's U Tips & Tricks
- Are you frustrated with your most recent trades? Trying too hard to make up for losses? See Trader's U #165 and #166, The Curse of the Low-Quality Trade series. I point out the four ways "marginal" trades can hurt you, and the tools for overcoming poor trading habits.
- In Dr. Mark Skousen's latest Investment U installment, he gives readers: "Investment Sites: The Three Free Websites I Use Every Day in My Research" to stay on top of financial and economic trends and data. Metals quotes and articles, company financials, GDP, CPI, etc. Take a look at this one.
The Chart of the Week
The Dow, S&P 500 and Nasdaq have all ground out good gains so far this year. However, the small-cap stocks, as represented by the Russell 2000 index, continue to far outpace their more highly capitalized brethren. This tells us that there is still little fear in the markets as investors, both large and small, are willing to take extra risk to make bigger gains. When we finally hit a significant market correction, look for the Russell 2000 to fall the farthest and fastest. Until then - enjoy the ride!
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