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Greed, Fear, Hope, and Regret

  
  Education
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There are four psychological states of emotions that drive most individual decision making in any market in the world. They are greed, fear, hope and regret.

Since the stock market is made up of individual human beings who tend to act in similar manners, a group is formed. It is only the group’s opinion that matters during a trend, but it is the individual trader’s job to identify the subtle clues as to when a market is about to shift direction.

The clues are there, but they are subtle. An awareness and detailed understanding of these emotions is what keeps the astute technical trader out of trouble by providing a means to identify individual weaknesses. We shall now take a closer look at these emotions, and provide examples of how they influence a trader’s ability to consistently make money.

What is Greed?

Greed is commonly defined as an excessive desire for money and wealth.

In trading terminology, it can specifically be defined as the desire for a trade to provide an immediate and unrealistic amount of profit. When greed sets in, all a trader can focus on is how much money they have made and how much more they could make by staying in the trade. However, there is a major fallacy with this type of reasoning. A profit is not realized until a position is closed.Until then, the swing trader only has a POTENTIAL profit (aka. “paper profit”). Greed also frequently leads to ignoring sound risk management practices.

What is Fear? (more…)

Random Trading Thoughts

  
  Education
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1. Do not think about making money, think about losing money – the first step toward success is accepting that losing is part of trading. You will not be right all of the time, you can not always trade your way out of a bad situation. There will be times when you simply have to walk away with a loss. The key is to keeping the losses small and manageable. When the market proves you wrong, take the loss.

2. Do not think you can average down to win – it is a logical idea, add more to a losing position with the expectation that the market must eventually go your way. Many times this strategy will work but, when it does not work, the loss may be insurmountable. The market does not eventually have to go your way.

3. Do not think that your success is entitled – you may make a great trade, pick a really great stock and have a feeling like you really have the market figured out. Forget your gloating, no one ever has the market figured out. We must always remember that we have to work as smart for the next trade as we did for the last.

4. Do not think that talent is required – making money in any trading endeavor is a small part technical skill and a big part emotional management. Learn to limit losses, let winners run and be selective with what you trade. Emotional mastery is more important than stock picking skill.

5. Do not think that you can tell the market what to do – the market does not care about you, it does not know that you want to make a profit. You are the slave, the market is your master. Be obedient and do what the market tells you to.

6. Do not think you are competing against other traders – trading success comes to those who overcome themselves, it is you and your persistent desire to break trading rules that is the ultimate adversary. What others are doing is of little consequence, only you can react to the market and achieve your success.

7. Do not think that Fear and Greed can ever be positive – in life, fear can keep us from harm, greed can give us the motivation to work hard. In the market, these two emotional forces will lead to losses. If your decisions are governed by either or both you will most certainly find that your money escapes you.

8. Do not think you will remember everything you learn – every trade provides a lesson, some valuable education on what to do and what not to do. However, it is likely that your lessons will contradict one another and lead you to forget many of them. Write down the knowledge that you accumulate, return to this trading journal so that you can retain some value from the lessons taught by the market. Remember, the market is cruel, it gives the test first and the lesson after.

9. Do not think that being right will lead to profits – you may be exactly right about what the fundamentals are and what they are worth. However, timing is everything, if your expectations for the future are ill timed, you may find yourself losing more than you can tolerate. Remember, the market can be wrong longer than you can be liquid.

10. Do not think you can overcome the laws of probability – traders tend to be gamblers when they face a loss and risk averse when the have a potential for gain. They would rather lock in a sure profit and gamble against a probable loss even if the expected value of doing so is irrational. Trading is a probability game, each decision should be made on the basis of the best expected value and not what feels best.

10 Favorite Quotes from Reminiscences of a Stock Operator

  
  Education
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  • There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
  • The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals.
  • I never lose my temper over the stock market. I never argue the tape. Getting sore at the market doesn’t get you anywhere.
  • They say you can never go poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand I made two thousand. That was what my conservatism did for me.
  • Remember that stocks are never too high for you to begin buying or too low to begin selling.
  • A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street…nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.
  • After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was the sitting. Got that? My sitting tight!
  • Losing money is the least of my troubles. A loss never bothers me after I take it…But being wrong—not taking the loss—that is what does the damage to the pocketbook and to the soul.
  • Prices, like everything else, move along the line of least resistance. They will do whatever comes easiest.
  • The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you hope that every day will be the last day—and you lose more than you should had you not listened to hope—the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out—too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts…Instead of hoping he must fear; instead of fearing he must hope.

BETTER TRADING

  
  Education
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“Any thought put into your mind and nourished regularly, will produce results in your life.” John Kehoe

An affirmation is a statement made in the present about the future as if it had already occurred in the past. Let me say it more simply. An affirmation is a simple statement about what you want to become true in your life. You state it in the present tense as if it were already true. You repeat your hopes and dreams. You declare the opposite of your fears. For example, the fear that you could lose all your money becomes: “I grow my capital through consistently applying my winning methods.”

Be careful to word the affirmation in the present tense. Statements made in the future stay in the future. “Next month I’ll turn my trading around.” stays out there in the future. Now is when you need to turn the trading around.

Affirmations can be repeated to yourself silently or aloud. You can incant them with feeling or whisper them to yourself. You can record them and play them, or write them and read them. A good time to assert them is just as you’re falling asleep or waking up, or any other time of the day. You can say them while you drive or wait in a bank line or as you watch the market or manage a trade.

And here is a little miracle. You don’t have to believe the truth of the affirmation in order for it to have an effect. Of course, it’s better if you imagine it to be true or becoming true.

Sometimes it’s more believable if it’s a process statement. “I am slender” can change to “I am becoming slender.” “I am consistently profitable” changes to “I am becoming more consistently profitable.” There are times when the process is more credible than the reality.

You can also turn the statement into a question. “In what ways am I becoming a better trader?” “How am I becoming a more professional trader each year?” The mind accepts the truth of the question and searches for evidence. (more…)

No Patience on Entry

  
  Education
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Anticipating a signal that never comes is common for traders monitoring the market closely and eager to get some money working. For example, a good buying opportunity arises when a stock breaks from an ascending triangle. Jumping in ahead of the breakout is not an ideal situation because the probability of success buying an ascending triangle is not as good as buying a breakout from one. What causes this mistake? I think a fear of missing out on the maximum amount of profit or the fear of too much risk in buying a stock are the two most common mistakes. Essentially, the two guiding forces of the stock market are at work here; fear and greed. By buying early, we can realize a greater profit when the stock does breakout since we will have a lower average cost. Or, by buying early we can reduce risk since a breakout followed by a pull back through our stop will result in a smaller loss as we have a lower average cost. What tends to happen, however, is that the stock does not break out when expected and instead pulls back. This either leads to an unnecessary loss or an opportunity cost of the capital being tied up while other opportunities arise.

The Solution

The simple and obvious solution is to wait for the entry signal, but there are also some things you can do to help yourself stay disciplined. Rather than watch potentially good stocks tick by tick, use an alarm feature to alert you to when they actually make the break. Watching stocks constantly is somewhat hypnotic, and I think the charts can talk you in to making a trade. However, letting the computer watch the stock may help you avoid the stock’s evil trance. Another good solution is to focus on different thoughts when considering a stock. Don’t think about potential profits, don’t think about minimizing losses. Instead, focus in on the desire to execute high probability trades. It takes time to reprogram yourself, so persevere.

The James Bond Method To Stock Trading

  
  Education
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So you want to be high flyer? Drive fast cars, attract the hot women, and travel the world? What sounds like the James Bond way of living, isn’t actually too far off that of a successfully wild stock trader?

While this approach might not be the most risk-adverse style of trading , we can all learn a thing or two from James Bond when it comes to making big bucks in the stock market.

Don’t worry about the consequences

While he may get himself into some crazy situations, James Bond never lets fear get in the way of getting the job done. Bond will walk straight into dark hallways and rooms filled of bad guys, confident that he has the upper hand.

Just like Bond, you too can block out potential consequences of stock trading. Don’t let the fear of losing money or a failed trade scare you away. Head into any situation, confident in your trading strategy.

Never get stressed out

For as great as Bond is, no other action hero gets caught into messy situations as much as Bond does. From the initial capture to just seconds before he finds his way out, Bond never loses his cool.

He stays calm under pressure and focuses on what to do next, rather than what might happen.

Just like Bond, you too can learn to keep cool under difficult situations. Understand that you don’t necessarily need to sell at the first sign of red or throw more money at the stock. Simply stay calm, asses the situation, and find your way out.

Don’t stick around too long

Just as fast as the actual characters who play Bond shift, Bond himself never stays in one place too long. One second he could be in Russia and the next minute he is in Las Vegas. Even the time he spends with a woman is never too long to get him into any trouble.

Like Bond, you too should never stay around a stock too long. For quick action, jump from stocks to stocks finding the ones with the most momentum and skipping out on the stale ones.

Indulge

While Bond maybe running to stop a nuclear bomb from going off, there is always enough time for a drink or a romantic night with a lady friend.

While stock trading is a serious matter, it doesn’t have to all be about facts and figures. Make sure to set time aside and enjoy the fruits of your labor. It keeps the game interesting. (more…)

The PROPER Use Of Hope and Fear

  
  Education
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If you’ve been involved in the markets for any length of time you will no doubt have heard of the twin pillars of market psychology, Hope and Fear (or sometimes Greed and Fear).

In fact, if you’ve ever been involved in an endeavour where you have something on the line – a business, a wager, a job, or even a date – you will have experienced Hope and Fear in some form and the devastation it can play on your psychology.

Experiencing Hope

For most traders, Hope looks like this:

They’ve just bought a stock or commodity, and they hope that it goes up.  Of course, this is the name of the game, we all hope it goes up if we are buying!  But then the stock starts to fall, and instead of selling out, the trader holds on with the hope that it will rise again.  The more the stock falls, the more they hope and pray that it will rise.

But they don’t realise – Hope does not equal Action.  And only our Actions make money in the stock market.

Experiencing Fear (more…)

The market is like an ocean

  
  Education
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trading_for_a_livingThe market is like an ocean – it moves up and down regardless of what you want. You may feel joy when you buy a stock and it explodes in a rally. You may feel drenched with fear when you go short but the market rises and your equity melts with every uptick. These feelings have nothing to do with the market – they exist only inside you.

The market does not know you exist. You can do nothing to influence it. You can only control your behavior.

The ocean does not care about your welfare, but it has no wish to hurt you either. You may feel joy on a sunny day, when a gentle wind pushes your sailboat where you want it to go. You may feel panic on a stormy day when the ocean pushes your boat toward the rocks. Your feelings about the ocean exist only in your mind. They threaten your survival when you let your feelings rather than intellect control your behavior.

A sailor cannot control the ocean, but he can control himself. He studies currents and weather patterns. He learns safe sailing techniques and gains experience. He knows when to sail and when to stay in the harbor. A successful sailor uses his intelligence.

Four Common Emotion Pitfalls Traders’ Experience

  
  Education
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Peak performance in trading is frequently hindered because of the emotions a trader feels, and more importantly how their trading behaviors change based on those emotions. I have found that the following four emotional experiences have the greatest, direct impact on a trader’s ability to achieve higher levels of success.

 

1)      Fear of Missing Out

2)      Focusing on the Money and Not the Trade

3)      Losing Objectivity in a Trade

4)      Taking Risk Because you are Up (or down) Money

 

Fear of missing out occurs when a trader is more afraid of missing an opportunity than they are of losing money. As a result, traders tend to overtrade in a desperate effort to ensure that they do not miss out on money-making situations. This overtrading can then potentially trigger an undertrading response if the traders experience a “trading injury” such as a big loss along the way. The way to solve this is first to accept the reality that you’re always going to miss out on something, somewhere. The second step is to establish game plans on paper and hold yourself accountable to executing those plans.

 

Focusing on the money and not the trade limits performance because the trader quantifies their success based on their profit and loss data. As a result, when he or she is up or down a certain amount of money that they view as significant, they alter their trading behaviors regardless of what the actual, real trading opportunity is that is presented to them. The way to solve this is to quantify your success based on HOW you traded not HOW much you made on the trade. Did you have edge? Was it your pitch? Did you make a high-quality trade?

 

Losing objectivity in a trade occurs because traders develop emotional ties to their previous entry levels. The trader is no longer making trading decisions based on the trade, but rather based on how much they are up or down in the trade. The key to overcoming this is for the trader to continually ask him/herself, “Why am I in this trade?” and “If I was not in this trade right now, would I enter this trade long, short or do nothing?”

 

Taking bad risk because you are up or down money

People do not like to lose – especially money. Normal solid risk/reward thinking becomes skewed once a trader is up a large sum of money. They begin to experience something called “mental accounting” and they treat money differently based on how they made money or how quickly they earned it. On the flip side, when traders are down money, they tend to be consumed with trading for revenge and trying to make it back, oftentimes as quickly as they lost it. As a result, they may take “shots” or do the “screw it” trade because they feel helpless. To solve this destructive behavior, the trader should use their trading journal to document their emotional highs and lows and what triggered it so they can be in tune with when they are feeling over-confident or angry/frustrated. Once they recognize these emotions, they should immediately call a time out and step away from the computer or reduce the risk they are taking until they can bring themselves back to center court.

Howard Seidler-Trading Quotes

  
  Education
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The single most important element to being successful in the markets is having a plan. First, a plan forces discipline, which is an essential ingredient to successful trading. Second, a plan gives you a benchmark against which you can measure your performance.

It’s important to distinguish between respect for the market and fear of the market. While it’s essential to respect the market to assure preservation of capital, you can’t win if you’re fearful of losing. Fear will keep you from making correct decisions.

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