Are you a lion or a wolf?

Some traders I speak to are determined to spend more time on their trading in 2012 … others I speak to have promised to spend less time at their screens …

Perhaps you fall into one of these camps … I see them as trading “wolves” and “lions” – two very distinct trading styles.

Are you a lion?

Lions are not very fast animals. Yet, the animals they hunt are some of the fastest on the planet. Therefore, lions have developed a very effective hunting method that involves finding a bush close to something your prey needs (usually water), climbing in, and waiting. In this way, our lion is able to catch up on some sleep, while technically is “out hunting”.

It’s low-effort, and highly effective.

Or a wolf?

For a wolf, by contrast, finding enough food to eat is a full-time job. They’ll travel vast distances in order to hunt down their next meal, often pursuing running prey animals for long distances over rough terrain.

There’s nothing low-effort about this style of hunting. But, again, it is highly effective.

How lions trade

If you see yourself as a lion-style trader, then you’re probably going to be attracted to set-and-forget strategies. These really can be as simple as they sound – you just “set” up the trade (like the lion finding a bush to hide in near the watering hole), and then “forget” about it for a period of time.

But set-and-forget trading isn’t about lazy trading – there are a lot more benefits to this than simply being able to catch a bit of shuteye between trades.

The set-and-forget trader can still go about his life as normal (which means that he can keep his day job) because he won’t be spending hours in front of his computer.

And extra screen time does not equate to extra profits.

Too often, spending more time watching our trades causes us to “fiddle” with them. It’s hard to stay disciplined and on-track while you’re watching the price level moving. If you’re not watching your trading screen, you can’t commit trading crimes like moving your stop loss … adding to a losing position … closing out early …

Instead, your parameters are set, and the rules will be followed.

Now, detractors of set-and-forget strategies will tell you that they can’t possibly adapt to market conditions or take into account events that happen while you’re “forgetting” about them. And this is true.

But what a set-and-forget system does is it releases us from the quest to always get every trade right – it’s an impossible mission. Some of our trades will always lose. What’s important is that our strategy gives us an edge over the market. And, in my experience, for the majority of traders, a set-and-forget strategy gives them exactly the kind of discipline that can bring long-term trading success.

However, it would be foolish to ignore what the detractors are saying – there are downsides to set-and-forget strategies. And for traders who are disciplined, a well-managed system can hold many benefits.

How wolves trade

A trader who prefers to be watching his trades, and managing them as the market conditions change, will, no doubt, be able to show you many examples of how a set-and-forget system would have failed, while his managed system won.

The downside of a set-and-forget system is that sometimes it can leave you in a trade that logic and reason would tell you should be closed (or even never opened in the first place).

While you’re getting on with the rest of your life, a strong resistance level might have formed, telling you that your profit target is no longer valid … a piece of economic data might have come out that completely invalidates your position … A new support level might have appeared which makes your stop-loss level look unnecessarily wide.

By managing your trades, you can be smarter about where your stop levels and profit targets are positioned – and you can move them to reduce risk and maximize profits as the trade progresses.

For me, personally, managing trades is something that helps me to control risk and keep a tighter grip on the purse strings. By moving in my stop losses to breakeven, I can reduce the capital I have at risk in the market – plus get that money working harder for me elsewhere.

But managing your trades isn’t something to be done in a slap-dash fashion. I have a checklist of the things that will affect my trading decisions – and that checklist doesn’t include “what I think might happen”. However, I’m not a robot, so “whims” and “feelings” can creep into my trading decisions, and it’s a constant battle to keep these in check.

And, of course, if you want to manage your trades – you’ve got to be prepared to put the hours in.

It’s impossible to tell which of these two styles is best suited to you – it’ll depend on the strategy you’re using and your trading personality and experience. But by managing trades, you can reduce the number of losing trades (sometimes at the expense of a winning trade), which can help to keep us in the game (both practically and psychologically).

The hybrid trader

I see my own trading as falling somewhere between the two camps.

I use some set-and-forget trading, and some managed strategies. I value both, and see the set-and-forget trading as a good way to keep myself disciplined. But I love the chase too much to spend my trading day asleep in a bush!

Related posts:

What is a stop loss? Set and Forget Trading: less effort … better selection