Thursday, February 11, 2010

The Kirk Report

The Kirk Report

Consider The Consequences

Posted: 11 Feb 2010 11:35 AM PST

I love the scene in the television show The Office when a woman standing in a long line asks Dwight Schrute to hold her place behind him because she has to go and use the restroom. "No!" he replied. "Did you grow up in a household without consequences?" After looking back at him with a mixture of both disbelief and disgust, Dwight then explained to her that he had taken enough time to go to the restroom BEFORE getting in to the long line and she should have done the same.

Those of us who follow the rules whether it be in life or trading, can sympathize with Dwight, especially when dealing with other people who don't follow the same rules you think are important and who impact you in some negative way.

I was thinking about that this morning after a few things happened this week that illustrate again that not only do most people break the rules (even the ones they set for themselves in trading) but that most don't spend a single moment thinking about and considering the potential consequences that could follow BEFORE those rules are broken. And, I think that's an important point.

The truth is that as traders and investors, we all set rules for ourselves to follow whether we are conscious of it or not. Most of us in fact do a pretty good job of following those rules and, of course there are rare times the rules must be broken. No rule will work perfectly in every type of environment which is why some of the best traders out there are those who learn to be flexible when the environment demands it. A combination of skill and experience will help you know when those rules are not working to your advantage.

But, in those traders who are flexible and successful, you'll often see something very different which is that they also make absolutely sure that when they do violate their own rules, that they've taken enough time and have properly considered all of the most probable consequences both good and bad that could follow before violating that rule. They don't simply say, I'm not going to follow my trading rule today and at the same time not fully understand the potential consequences that could follow from doing so. As many of you have already discovered, that's a terrific way to get into a lot of trouble.

I've learned over time that when I am contemplating breaking one of my own rules (like chasing a stock that doesn't fit my low/risk high/reward strategy for example) I also require myself as a matter of habit to stop, think, and quickly outline the probabilities of what could follow if I break or abandon my rule. In doing so, more often than not, by considering those consequences, I'm reminded why I set the rule in the first place and just simply follow the rule. In fact, it is often much easier that way. But, there are rare occasions, where after I go through and outline the consequences that when I consider everything, I think the rule should still be broken in that particular situation.

Learning when that is the case is an important element of being a successful trader. In fact, it is often in the rule breaking and subsequent tracking of the consequences that follow from it that you learn more about who you really are and how to become more successful in the market.