BarroMetrics Views: Comfort Zone
Daniel’s question dovetails nicely with the topic of today.
Last Saturday and Sunday, I was in Guangzhou and Shenzhen to give presentations for Oanda. Each venue had around 300 attendees, and the attendees at the two locations could not have been more different.
Taken each audience as a whole:
- at the former, I saw a willingness to change and embrace change in areas that were not working for them;
- in the latter, there was more a tendency to stick with their comfort zone even though the results they were attaining were less than optimal.
- At the former, they asked probing questions about change;
- at the latter, they tended to ask questions seeking answers to confirm their preconceived ideas.
And this brings me to Danie’s question (See comment in Learning Process II).
‘Comfort Zone’ is where we act as a matter of course. In trading this may include ‘trading without trading rules’, or trading ‘too small size’, or ‘refusing to define a “get out strategy” before taking a trade, etc. In short, it can be defined as a ‘habitual process’ that causes us no discomfort. In and of itself, the habitual process is neither ‘good or bad’ – we need only change the process if it is not (or is no longer) serving our needs and goals.
To answer Daniel’s question…….that depends on the sum of your Expectancy Return.
(Average $Win x WinRate) – (Av$Loss x LossRate) = ExpRet
Determine the ExpRet that defines your long-term goal, slot in your WinRate and LossRate, and you will have the minimum Reward:Risk you will need to generate your ExpRet. If you find you have room to increase, then do so in graduated steps.
Another area where ‘comfort zone’ raises its head is in the area of stop use and stop placement.
Stop use: Too many traders refuse to predefine ‘if wrong, exit strategies’. The unarticulated fear is the market will move exponentially in the direction of the trade (after being stopped out) without giving us the chance to get aboard. What is not envisaged is the market continuing to move against the position until the adverse move wipes out the account.
Stop placement: If you find that you are continually being stopped out only to have the trade then hit your profit target, this means your stop is too tight. You can use Maximum Adverse Excursion to work out what your minimum and maximum stop should be.
‘Getting comfortable with discomfort’ means taking the action we have decided will move us to our goals – even though the new action causes discomfort (usually because it’s an action we have not undertaken previously).