An email I received deserves a quick run down memory lane today …

I am an avid follower of your articles. Your write-up on “Knowledge, Actualization, and Screwing Up ” is by far one of your best works, and it reminds people like me how it is possible even for smart, successful and patient traders to lose sight of the bigger picture. It clearly tells us the importance of NOT straying from one’s game plan (including aspects of scaling up/position sizing) and to an extent, how it will help if one can imbibe disciplinary qualities right from the start. So, as a beginner, I hope to learn from your experiences – especially from one as powerful as you’ve just shared.

Knowledge is one thing, actualization of that knowledge is something else entirely. In my mind, this fundamental difference is the source of the problems we create for ourselves, problems arising out of the inability to do what we know is the right thing to do.

How many traders fall victim to this basic problem? I don’t have a number, but I can tell you that whatever that number is, it is huge. Yes, we know we should not pull our stops, we should only enter a trade on the “buy” signal, and we should never trade on a cloudy day. We know these things to be “right” (well, maybe not the cloudy day thing), but, yet, we still don’t always actualize the knowledge we have; we end up making a mistake. Why is this? I believe the answer resides on the emotional plane of life, and to demonstrate this, I will tell you about the experience I had this past week playing poker.

As I told you the other day, I am taking a break from trading, and I am playing more poker to fill some of that time. I also told you that I was playing well, getting lucky, and building my bank. What I did not tell you is that I felt pretty good about my winning streak, and that was the inspiration for moving “up in class,” playing for higher stakes. Now, I knew I should have stayed the course with my game plan, which was to build my bank slowly and then move up to the bigger games. I understood when I formulated my strategy that to play in the bigger games, I needed to be able to absorb larger losses. Did I actualize that knowledge? Well, no, not exactly.

Part of the overall plan for poker (and trading as well) is that when you are winning, you stay with what got you there. In the words of someone long ago who understood this,” You dance with the one who brung you.” So, if your strategy is working, stay with it.

Anyway, as my winning streak rolled on, my confidence grew, which is good, unless that confidence turns into hubris, that oh-so-human state the ancient Greeks believed brought on the wrath of the gods. I don’t know if the “gods” twisted my luck, but in a flash, my winning streak turned into losing streak, and those losses magnified in scope for two reasons. One is that I was playing at a higher level, so the losses, were, naturally, larger. The second is more profound. Because my fortunes changed so swiftly, I became an emotional player. I started rationalizing, which turned into an inability to actualize what I knew to be right.

You see, I got knocked out of three tournaments in a row in such a manner as I have yet to see in my long days of playing poker, and that spun me round, twisted me up, and set me up for the losses that would come and come quickly. The first two “knockouts” came when my pocket kings put me all in against pocket aces (oops!). The third loss sent a message in bright, pink neon – stop playing, collect yourself, and get back on track – but I did not see the message. All I saw was that my pocket aces were just beaten by three kings. So what did I do? Frazzled, frustrated, and fretting, I jumped back in swinging for the fences. I bet big, determined to prove my winning streak did not end with those three unbelievable losses, and I lost even more. In fact, I lost most of my bank in several more quick exits.

So, every day, I write about what I know is right, but I am fallible. Sometimes, I cannot actualize what I know is the right course of action. Sometimes, I screw up. Keep this in mind as you read my words of advice in this column.

Trade in the day; invest in your life …

Trader Ed