Thursday, October 13, 2011

Learning from the Past Rather Than Living in It

Trading Tip


by D.R. Barton, Jr.

This week I am writing from my hometown in Virginia where the leaves are starting to turn in the Blue Ridge Mountains and the setting is almost surreal. I am here to celebrate my grandma’s 93rd birthday.

I realize now that I took so much for granted growing up here. The natural beauty of the area, with all of the elevation changes, is amazing. Toss in the yellow, orange and red leaves on the trees, and you have a rich tapestry that has to be seen to be believed.

In the midst of this splendor, my grandma leads a gracious life in a house on the hills. Grandma Megs gardens, cooks and cleans, and is an active leader in her local church. She still drives to the market, church, and all over her little town visiting friends and shut-ins. This past Saturday, her church participated in the Heritage Day fair, and my grandma was right in the middle of it. She single-handedly made 301 biscuits!

While the good health and active life that she enjoys is enviable, what impresses me most about Grandma Megs is the grace and kindness with which she leads her life. She treats everyone she encounters with kindness, compassion and joy. And she has a way to make you feel better after an interaction with her: an encouraging word, a gentle touch or a simple act of kindness leaves a wake of positive energy with all those around her.

As I reflect on Grandma Megs, I have found that there are two types of people who have reached a certain age and experience level—those that are inwardly focused and those that are outwardly focused.

Inwardly-focused people tend to talk about their infirmities and recount past happenings. They relive past glories and avoid past misfortunes.

Outwardly-focused folks concentrate on what they’re going to do next. They talk very little about their own aches and pains but are keenly aware of the situations of those around them. While they have learned from the past, they don’t dwell on it. Instead, they use past experiences as a guide to help them understand how they can best spend their time in the future.

As traders and investors, we can learn much from these two types of experienced folks.

In my interactions with thousands of traders and investors, I’ve found similar issues with their focus.

Inward or Outward Focus in Trading

Inwardly-focused traders and investors often make decisions based on whether they can be perceived to be right rather than whether the decision pattern will be profitable in the long run. This need to be right reflects the tendency of inwardly-focused traders to overemphasize how trades or investments make them look. Traders with this inward focus tend to emotionally relive trades from the past, especially a particularly good or bad trade. This drives traders to change their decision making process based on the emotional impact of prior trades (and on events from a small sample size).

On the other hand, outwardly-focused traders care less about how they’ll be perceived and more about what is useful and works. Outwardly-focused traders live in the present with a bias toward the future. They learn from past trades and move on. They don’t let the outcome of individual trades change their decision making process.

I don’t want the labels I’ve used here to throw anyone off. There are many internally-focused activities that are useful for traders and investors. Personal development and looking inside one’s self to understand your trading and investing psychology are critical to trading success.

The great take away is that trading, like life, is best experienced by focusing on what’s happening now with a bias toward future results and activities. When you get caught up or overly influenced by what has happened in the past, you open yourself up to decision making biases that diminish enjoyment and results. It’s a way of life that my grandma has taught me and that will serve us all well!

Great Trading,
D. R.