Wednesday, June 9, 2010

Out Of Your Comfort Zone And Win

A problem traders often face is progressing forward; they may have found some success but cannot move beyond that level. Once a certain comfort level has been attained, whether it be in the size of the positions taken, the profit made each day (or during any time frame) or a familiarity with a certain instrument, it can be hard to break out of the comfort zone. Breaking out of a comfort zone can mean increased profits, psychological fortitude and increases in your standard of living including a reduction in work time. In this article we address what the comfort zone is, how we know when we are in it, when we are not moving out of it and most importantly how to break free into an increased level of performance. (Still not there? Check out Finding Your Investing Comfort Zone to learn how.)

The Current Comfort Zone

We will always be more comfortable with things that are familiar to us. In trading, this can often mean that we become accustomed to trading a maximum amount of shares or making a certain amount of money but find it hard to take our trading to the next level. Comfort is a pleasurable thing, even if we are unsatisfied with what the comfort zone brings us. The anxiety associated with moving outside of what is familiar is a deterrent, and can therefore prohibit the trader from progressing, even if that is the desire.

This protection mechanism is actually a good thing. If comfort zones were easy to break out of, it is quite likely that traders would take positions far beyond their means and end up fading from the markets. The comfort zone protects us, but can also become a problem when we desire something that lies outside of the comfort zone. To step outside the comfort zone without exposing ourselves to too much danger requires a plan and a system — just like our actual trading should. (For more, see Optimal Position Size Reduces Risk. )

Retreating or Advancing?

The problem with stepping out of comfort zones is that people often try to make leaps toward what they want. This may work for some people, but for others it will only make them want to stay in their comfort zone even more because of the anxiety created by biting off more than they can chew.

Let’s say a person has a large trading account. That person trades with stops and has a good trading plan, but is having trouble increasing his position size to take advantage of capital. Capital is sitting idle, and an opportunity to utilize that capital and potentially make money is being missed. (For more, see Looking Deeper Into Capital Allocation .)

On a given trade, that person is comfortable taking 300 shares, but this is far less than what he can take, given his capital and stop levels. While no single trade should represent a potential loss of more than 1% of all capital (and can be even smaller for large accounts), the trader should try utilizing the capital — after all that is why the capital is in the trading account.

Assuming, based on capital levels, the trader can easily move up to 1,000 share positions in most of the stocks he trades without exposing himself to too much risk, a simple approach can be taken to increase the share lots traded.

Stepping out of a comfort zone takes time. This trader will first increase his position size to 400 shares. He will trade this size until he is comfortable with it, and will then move to 500 shares until he is comfortable. Then the trader can move to 600, and so on, until he reaches his goal.

This sounds very easy, but there are several things to remember, otherwise it is very likely the trader will end up right back at square one.

Slow and Steady

If we do not make sure that we are comfortable at each incremental level before progressing to the next level, we run a high risk of undoing all of our work. Let’s say our trader jumps from 300 shares, to 500 shares, and then to a 1,000 shares. The uncomfortable feeling associated with a 100% increase (500 to 1,000 shares) in position size may cause him to feel that the jump is not worth it, and go right back to trading 300 shares (the most comfortable position size). Also, if this jump results in a loss, or anxiety which causes him to abandon his trading plan, he may feel regret and think that he should have never tried to trade more shares in the first place. These may not be fully conscious thoughts, but on a subconscious level the mind recognizes that it cannot cope with the leap, and is likely to revert back to old habits. (To learn more, read Day Trading Strategies For Beginners .)

Therefore it is very important to move out of the comfort zone in incremental levels. We must be comfortable with each level before moving onto the next one. In this, we progress our comfort zone by edging it forward instead of breaking out of it.

This is applicable with many other trading related issues. If we wish to trade a different security or market, we can gradually introduce ourselves to it. If our profits seem to have peaked, this could also be a psychological issue. When we reach our plateau level, our aim should be just make slightly more to get us over the hump. This can be done by finding one more high quality trade with little risk (small position) to allow ourselves the possibility to move beyond the profit level, which seems to act as a roadblock. This is a common comfort zone issue among day traders. (Learn more in Trading Psychology And Discipline .)

The Benefits

There are obvious benefits to progressing our comfort zone(s). In trading, we may end up making more money, trading more instruments and thus find more opportunities or become more disciplined. Good habits can be accentuated, and bad habits can fade if we progress in small increments. Progressing in this manner can have a profound effect on our standard of living and how we feel overall. Trying something new can be very exciting, increasing our fulfillment with the activity and increasing confidence. Also, progressing one area of our trading can often have a positive impact on other areas of trading, and life in general.