Traders are told they need to keep an eye on their portfolio. And there’s certainly merit to the suggestion. After all, how can you make a quality decision about trade management if you don’t even know the status of your beloved positions? Are you winning or losing? Is your profit target near or far? Such questions must be posed and answered if you are going to execute your well-thought-out plan properly.

Unfortunately, such obsessive observation is not without its risks. I was reminded of the drawbacks during my latest reading of Nassim Taleb’s superb Fooled by Randomness. Within, sir Taleb shares a story of a retired dentist with a whizbang investing record. His expected returns are 15% with a 10% annual volatility. Essentially, 68 of the next 100 years should see returns that fall between 5% and 25%.

We can translate this into a 93% probability of success in any given year. That is, the dentist should see his portfolio rise virtually every year delivering consistent goodness.

Here’s where Taleb goes to work illustrating the detrimental impact of excessive observation.

“But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second … Over the very narrow time increment, the observation will reveal close to nothing. Yet the dentist’s heart will not tell him that. Being emotional, he feels pang with every loss, as it shows in red on his screen. He feels some pleasure when the performance is positive, but not in equivalent amount as the pain experienced when the performance is negative.

At the end of the day the dentist will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unplesaurable ones.”

Now for the money statement:

“Now realize that if the unpleasurable minute is worse in reverse pleasure than the pleasurable minute is in pleasure terms, then the dentist incurs a large deficit when examining his performance at a high frequency.”

This speaks to the concept of loss aversion theory. Google it to be enlightened. Studies show that the pain inflicted by a $100 monetary loss is far greater than the pleasure provided by a $100 gain. Reflect on your own experience, and you’ll discover this to be true.

In contrast to the minute to minute viewing, if our dear dentist only looks once a month, then 67% of his glances are positive; and if he only looks once a year, he will relish in 19 pleasant episodes versus just one unpleasant one.

Source: Fooled by Randomness

One of Taleb’s three critical conclusions states that “over a short time increment, one observes the variability of the portfolio, not the returns.”

That sounds like the least fun endeavor ever. I don’t want to suffer through the battle blow-by-blow, man. I want to fast forward to the end when the victory is clinched.

How do I do it?

Simple. I don’t watch.  You too can limit yourself to checking in on the performance at appropriate intervals. If you’re an active trader you’ll need to keep tabs on your portfolio regularly. But don’t overdo it. There’s no need for a covered call trader or naked put or condor seller to dig into their five times a day. Once a day or week may be sufficient. Particularly if the appropriate exits have been pre-set

Rookie traders just can’t help but look at their profit/loss multiple times a day.

Like moths to a flame.