Trading with Emotion
Hey, Joe, where you going with that gun in your hand?
This past week I have had several conversations with traders who are doing poorly. Very poorly.
These are experienced traders who have been successful in the past but are now losing gobs of money.
After the usual whining about the choppy market, our conversations got down to the guts and bone of their problem. While each of them trades in a slightly different fashion, the crux of their problem is, as is usually the case (in my opinion), too much thinking and choosing the wrong stocks to trade.
This post will deal with some of my opinions about the emotion/thinking process. Perhaps later, if I'm not run out of town, I’ll post about “wrong” stocks.
Here’s some of what I mentioned to these traders.
HOPE
When a trade goes against us, we tend to HOPE that every hour, ever day will be the last for this trend and that
the market will turn in our favor.
If the market does turn around, we feel vindicated for having known full well that it would.
If it fails to turn around, we simple HOPE even harder as we watch our money disappear.
Because we are not willing to accept the thought that we might have made a mistake, we cling to a losing position. We may even decide to Average Down, thus fortifying our deep seated belief that we couldn’t have been wrong in the first place, and will prove it by plowing more money into the stock.
NOTE: Does this work? Yes, sometimes it does. The price reverses direction and finally we are back in the money. And sometimes it doesn’t and we are the ones left holding the bag - an empty bag.
If we Average Down consistently, or even just every so often, we are using a “system” whose backbone is HOPE.
FEAR
When a trade goes our way we tend to become FEARFUL that the next hour, the next day will reverse and strip us of our profits. We seldom make as much profit from a trade as we could, had we not been in FEAR of losing some money.
NOTE: Does taking profits early work? Yes. We have all heard "You’ll never go broke taking a profit.
But did it ever occur to us that that old chestnut comes to us courtesy of those who have deep seated FEAR. They may not realize that the origin of this idea is FEAR. In fact, they may simply believe it to be Logical and Sane and even Wise. And if asked, they may not understand why they both believe and repeat this little phrase to others. But the fact is that it’s FEAR that tells us to take our money and run.
Reversing Hope and Fear
Simply put, we must learn to fear when we would hope and hope when we would fear.
We should FEAR that a losing position will get WORSE - that a small loss will become a bigger loss.
We must HOPE that a profitable position will become an even more profitable one.
Think You Way To Ruin
For several years, I listened to all the news, read reports, studied newsletters and tried to understand company fundamentals. I lost more money than I made.
Now I only catch the pre-market and after-market CNBC.
The only newsletter I get is Drbob’s and I spend more time getting opinions of other traders than those of analysts.
A little thought is necessary. A lot of thought causes pain and losses.
In my opinion, short-term speculation in stocks does not require or depend upon deep thought processes and analysis for positive results. In fact, I believe that the thinking trader is eventually a dead trader.
I’m aware that I may be alone in this belief.
Many may disagree vehemently.
Here’s some points that I believe support my case for Less Thinking = More profit.
1. As most of us realize, it is our emotions that are the weakest link in the success chain.
After all the research, analysis, and thought, we arrive at the moment of truth. At this moment, thought serves no purpose. We must “pull the trigger”.
Now, admit it. When I said “pull the trigger”, most of
you were thinking BUY.
How many of you were thinking SELL?
Sell must also be a prime consideration and must be in
your plan BEFORE you buy.
If it’s not, you must be planning on HOPE to get you through.
2. Are we insecure? Of course we are. We’re traders and all traders have experienced losses. We have spent large amounts of time and effort analyzing the market and a stock and carried out our trade according to the rules and still lost money. Aside from the money itself, these losses are frustrating and confusing. What do we do to overcome this anxiety? We resort to even deeper thought about how this could have happened.
No matter the how much time we spent, how well we researched, and how much thought went into the planning and execution of our trade, the end result was that we lost money. This sort of thing leads to insecurity.
What we should have done was to consider the plain fact that a given percentage of our trades will be wrong.
Accept that as a reality of trading and move forward.
3. Quite often there is simply so much information that we become less certain of the action we should take. Result: we take no action.
4. Thinking is a great excuse. Because there is so much information out there as well as opinions, we hide behind the guide of analysis so as to avoid making a decision. What’s more, we blindly tell ourselfs that making no decision was the right decision because there just wasn’t ENOUGH information to make a correct decision.
Put Thought Into The Method Not The Process
I use a trading method that requires almost no thinking.
My method required thought in it’s creation and in learning how to use and adjust to different stocks and market situations but it does not require deep thinking when it come to entering or exiting a trade. In fact, it requires almost none and there is an absence of “second guessing” which gets many traders in trouble.
From listening to others, I have believe that fundamental traders and traders without a method (system) are most likely to fall victim to information overload and as a result over thinking.
They say that thinking exercises and strengthens the brain.
But it doesn't take a strong brain to trade, it requires a
brain that isn't troubled. |
