Over-Conservative Traders: Words from a Master

In his book Technical Analysis and Stock Market Profits, Richard Schabacker – also known as “The Father of Technical Analysis” – wrote parting comments to naturally conservative or risk averse investors that I wanted to share. Keep in mind, these words were written in the 1920s.

He states that most market students need words of restraint, rather than encouragement to action. Traders who are over-cautious are in the minority, but, as Schabacker states, “this class also makes the most consistent success in technical chart trading.”

“The student who has the innate character most favorable to profitable chart trading is … naturally conservative and skeptical… towards all chart rules, and will therefore fear to trade where others will rush in blindly and overconfidently to their ultimate loss.”

“Though those of careful and skeptical temperament are clearly in the minority, they are the successful majority.”

“Although the conservative student will err on that side of his nature, he may – for that reason – be more successful in the long run. However, he must guard against over-conservatism and excessive doubt and timidity. The chief stumbling block for this group is hesitation.”

In describing a typical pattern, the trader properly reasons the market and patterns clearly, then he weighs the opposite possibilities too carefully and decides to wait for confirmation. When the confirmation arises, the movement gets away from him and the more he procrastinates, the more hesitant he becomes, the more psychologically uncertain he becomes, and the less likely he is to profit from his correct initial analysis.

“The result of his procrastination is not only a possible psychological upset, but the tendency resolves itself either in frustration or rushing in without careful analysis and entering at the time the proper move which was forecast is now ending, or about to reverse itself.”

To the over-conservative trader, “his aim should be to give direct and prompt expression to the dictates of his study and analysis, once they have led him to a sound conclusion.”

Over-conservative traders will find comfort in stop-losses. “By using stop-loss orders as protection whenever he fears an upsetting of a conscientious analysis, he may venture definite action on his conviction, with the serenity that comes from knowing exactly how much it is possible to lose in case the market does indeed move unexpectedly in opposition to analytical conclusions.”

Finally, “Conservatism in moderate doses is a critical characteristic for market success, but conservatism may be carried to profitless extremes just as easy as radicalism. A healthy mingling of decisiveness and conservatism is the ideal mixture for the successful trader, as for most other careers as well.”

Indeed I still find comfort in those words and can show countless examples in my own life where I would study charts and news endlessly, decide on potential trade candidates, and when I would open my order entry screen, be scared away by pointless second-by-second ticks. Either the price would decline and I would pass altogether and pat myself on the back, or the market would move (or have gapped) in my favor and I would say “Well, I missed that one. It’s time to do more analysis for the next one.” When the “next one” came, I would engage in the same self-defeating head-games.

Stop losses are a comfort, and are essential, but if you place your stops too close to your entry (or too close to support/resistance), then natural market action will take you out for a frustrating loss and that cycle continues the fear cycle you are trying so hard to overcome. Then the next time, you will likely be more hesitant and might pass on the trade simply because of insignificant reasons you searched for to ease your mind.

Although you might find comfort in the quote “…conservative traders have the most success long term…” realize that you must guard against over-conservatism. A healthy dose of skepticism in market action is fine, yet when experienced in large doses, it keeps you frozen in the present with a trading account staying constantly stagnant. While traders certainly want to avoid their trading account heading to zero from overtrading, we also want to avoid an account staying bogged down from chronic undertrading.

(Quotes come from “Trading Tactics,” Chapter XII, – P. 417)