Being Right vs Making Money – A Quick Thought

May 22, 2007: 7:31 PM CST

I have read many times how it is more important to make money in the market rather than be right-on with your opinion of price action or market direction.

How many times have you excitedly told your friends or family what the market was going to do the next day? Or what direction a particular stock was going to go?

When you were right, didn’t it feel wonderful!? You’re finally getting it and people are respecting you and asking you for advice. So, naturally, your ego is gratified and people ask you more questions about the market. It feels wonderful.

But there’s a dramatic difference between calling the market and profiting from the market (taking money out of a trade).

Is it possible to be wrong and make money? Absolutely!

Is it possible to be right and lose money? You bet! I’ve done both many times. I suspect you have too.

What happens when your stock-picking (or market discerning) skills actually CAUSE you to lose money?

When you tie yourself down to an opinion, you introduce an element to your trading that is often deadly: The Need to be Right (or Directional Attachment)

As humans, we are conditioned that being right is better than being wrong, and our psychology/emotions are set-up to reinforce this condition. If your trading becomes structured or founded on being right all the time, you set yourself up for eventual total failure. You cannot be right all the time and sustain a career in trading – the earlier you realize this, the better off you’ll be.

There are many ways to make money in trading that do not involve calling a direction in a stock or the market at all. In fact, many traders who are successful have developed strategies that take advantage of these opportunities or conditions. Hedging is a great example of ‘directionless’ or ‘opinionless’ trading. Certain types of spreading strategies classify as directionless (whether with futures or options).

I will be discussing strategies soon that capitalize on this concept of making money rather than being right. Feel free to post your ideas or thoughts/experiences.

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