First, a happy 4th of July! I hope you all have an absolutely fantastic weekend.

As I was thinking about the subject for this weekend's article I found myself a bit mentally mired searching for a topic. That happens every once in a while. I find that when I try to think of a topic rather than just letting it pop into my head from a reader's comment or something I may see or read I have a tough time coming up with something new or at least with some new twist. There is almost a little mental paralysis hindering the quest. Anyway, the thought of that paralysis made me think of how we are sometimes affected by paralysis in our trading.

One type of paralysis I've seen over the years is the paralysis of analysis where the would-be trader spends so much time and effort conducting his analysis that he may never pull the trigger and make a trade. That issue seems to be more prevalent with people in professions and vocations that require precision and perfection in their tasks. Engineers are classic (though not always fairly) examples of this type of paralysis. I apologize in advance to the engineers as I relate an observation a dentist I was coaching once made. He said engineers were his worst patients because they wanted a complete course in dentistry before they would permit him to drill a cavity. Obviously, that was hyperbole and meant in a joking manner, but it illustrates a type of trader paralysis. The person who seeks to learn every fundamental bit of information and then wants every technical to be in perfect alignment may never find a trade. He is caught in the confinement of his analysis process. Of course, I have to agree, if he does ultimately find a trade it may be a good one. It also may not be so good since the moment he enters the trade some fact about his stock or about the market in general may change and all the effort went for naught.

Another type of paralysis is the deer in the headlights phenomenon where the trader is frozen in fear or panic as a position goes the wrong way against him. Most of us have had that type of paralysis at some point in our career. It is often marked by comments like: "it'll come back." The fact seems to be that at times traders see a position go the wrong way and just can't seem to pull the trigger to take the loss and move on to the next trade. This paralysis results in a failure to cut losses and can be devastating to a portfolio.

While there may be other examples of paralysis in traders, each of the two may share a common cure in my view. The cure is to start trades with an exit strategy; one that will take the trader out of a trade before losses run too deep. If the paralysis by analysis trader is willing to look for a trade where the initial exit is nearby, he may begin to understand that the fear of loss that propels him into all the analysis in the first place may be alleviated by having an exit strategy that will cut any loss. The same, of course, is true for the deer in the headlights paralysis. If the trader has an exit strategy from the beginning all he need do is implement it.

If we are going to trade, we must understand that there will be risk and there will be losing trades. As I write at length and in detail in my first book, "Trade Your Way to Wealth" , there are many ways to manage risk so that if not eliminated it can at least be reduced and managed. Paralysis in trading results from emotions. Fear of taking a loss or fear that I trade I enter might lose. Fear can be overcome by knowledge and if we learn how to reduce and manage risk there is less reason for fear and a lesser likelihood of paralysis.

Good Trading!
Bill Kraft

Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with real-time alerts intended to provide you with the opportunity to make many, many profitable trades.

Here is a play from the Success Trading Group:

Wal-Mart Stores Inc. (WMT)
Our Success Trading Group members entered a position in Wal-Mart Stores, Inc. (Ticker: WMT) this week. We like WMT at its current price for new positions.

Have a great weekend and we'll trade next week.
Success Trading Group Team

Our Option Trading Service is for conservative traders that understand leverage principles and enjoy the challenge of options trading. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on always minimizing our losses!

The Option Trader service utilizes standard trading in Puts and Calls as well as strategies using Leaps, Straddles, Credit Spreads, Calendar Spreads, and Naked Puts. But no matter how sophisticated a strategy may be, we ALWAYS know our downside potential on every trade.

Here's a look at a trade Bill is currently working on:

1/100 DOW JONES INDUSTRIAL AVER (^DJX)
With the possibility of continued bearishness on the Dow, I am considering the possibility of a put debit spread, perhaps buying the Dec 100 puts and selliing the Dec 95 puts that would result in a net debit of a little over $2 on a $5 spread as of late Friday. That could set up the chance for a $3 gain on a $2 investment or the ability to make adjustments during the course of the trade.

Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
"Trade Your Way to Wealth" by Bill Kraft is an Amazon.com best seller!
"Smart Investors Money Machine" is Bill Kraft's most recent publication.
"Trading for Keeps: Making Money with Low Risk Option Trades" a trading DVD by Bill Kraft