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Emotions and Behaviors in Trading

  
  Education
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Successful trading requires the individual to have more than a certain amount of control over emotions and behaviors.
Emotions may include, but not be limited to, the following items:
1. Anger, anxiety, confusion, depression, disappointment, exhilaration, frustration, insecurity, passion, satisfaction, etc.
Behaviors may include, but not be limited to, the following items:
2. Arrogant, consistent, controlling, denial, following through, [im]patient, [ir]rational, letting go, perseverance, stubbornness, tenacity, etc.
Having control over these and other emotions and behaviors will allow for the trader to execute trades objectively, and more importantly, according to a strategic plan.

Sounds easy enough, does it not? “Execute trades objectively, and more importantly, according to a strategic plan.” Being that traders are human, it is not such an easy task to accomplish. It is not easy to be objective and diligent about sticking to a strategic plan day after day after day – especially with the constant volatility and erratic dynamics of the market tempting and enticing you at every turn to take actions that are NOT necessarily objective and NOT necessarily part of the strategic plan.

Common Mistakes to Avoid while Trading:

  
  Education
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 CommonMistakes1

 

  • Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
  • Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin).
  • Average down in price: Placing good money after bad is a loser’s game.
  • Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
  • Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
  • Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision. (more…)

7 Bad Habits of Traders

  
  Education
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  1. Trading with no stop losses. You can’t control your profits but you can control and limit your losses with a planned exit. Not having an exit plan can be very expensive when a trend takes off against you and you start hoping instead of just cutting your losses and moving on.BAD-HABITS

  2. Your opinion can be very expensive. Trading your opinion against all other market participants can be very expensive. The market goes where it wants and when you disagree with where it is going it will cost you.
  3. “Egos are expensive things.” – Ray C. Freeman. Inflated egos cause a trader’s #1 priority to be proving they are right and refusing to admit when they are wrong. It is very expensive for ego gratification to be above making money.
  4. Trading off predictions can cost a lot of money when they are wrong. There is more to be made by reacting to what the market is doing instead of predicting what you think it will do later.
  5. Stubbornness causes small losses to become big losses. It causes a trader to make the same mistake over and over becasue they do not assimilate feedback they keep doing the same thing over and over and getting the same results.
  6. Not having an exit strategy for a winning trade can be very expensive, it is possible to ride a big winning trade into being a big loser if you do not have a set way to take profits. Trailing stops and targets can put the profits in the bank.

  7. Trading too big of position sizes for your account size can be very costly because no manner how good your winning trades are you are set up to give back the profits with a few big losing trades.

Trading Mistakes: Avoid at all Costs

  
  Education
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Common Mistakes to Avoid while Trading:

  • Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
  • Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin). (Learn to position size)
  • Average down in price: Placing good money after bad is a loser’s game.
  • Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
  • Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
  • Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision.
  • Buying 52-week lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom along with weakness and downward momentum. Buy strength and the momentum moving higher.
  • Pure Fundamentalist: Technical analysis is a must! Use candlestick charts that show the price, volume and major moving averages – this is all you need, don’t complicate the process.
  • Making trading decisions based on taxes: Never buy or sell based on taxes alone.
  • Buying based on dividends: Don’t buy based solely on dividends; most growth stocks will never give out dividends
  • Buying familiar names: Yesterday’s leaders are not likely to be tomorrow’s stars. Look for solid new companies with great earnings, sales and a product in demand. Don’t buy a stock based on a popular household name.
  • Lack of action: Be able to move on a dime. Time is money, don’t procrastinate or hope for something that may never happen.
  • Lack of Consistency: Develop a method suited to your personality; stick to it and don’t trade blindly.

On Flexibility

  
  Education
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#1 Rule of Investing: Be Flexible – Roy Nueberger

Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and skeptical. – John Templeton

Pliability: Consider and reconsider the facts, and your opinions. Stubbornness as to opinions-“cockiness”-must be entirely eliminated. – Bernard Baruch

Ignore mechanical formulas – Phil Carret

If there is anything I detest, it’s a mechanistic formula for anything. People should use their heads and go by logic and reason, not by hard and fast rules. – Gerald Loeb

Empty your mind, be formless, shapeless–like water. Now you put water into a cup, it becomes the cup, You put water into a bottle, it becomes the bottle, You put it in a teapot, it becomes the teapot. Now water can flow or it can crash! Be water my friend. – Bruce Lee.   Ok, this quote comes from the world of martial arts, but the lesson transcends mere combat.
 

R.W. Schabacker, the financial editor of Forbes magazine, penned the following advice (warning) in 1934

  
  Education
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No trader can ever expect to be correct in every one of his market transactions. No individual, however well he may be grounded, no matter how much experience he has had in practical market operation, can expect to be infallible. There will always be mistakes, some unwise judgments, some erroneous moves, some losses. The extent to which such losses materialize, to which they are allowed to become serious, will almost invariably determine whether the individual is to be successful in his long-range investing activities or whether such accumulated losses are finally to wreck him on the shoals of mental despair and financial tragedy.

THE TRUE TEST

It is easy enough to manage those commitments which progress smoothly and successfully to one’s anticipated goal. The true test of market success comes when the future movement is not in line with anticipated developments, when the trader is just plain wrong in his calculations, and when his investment begins to show a loss instead of a profit. If such situations are not properly handled, if one or two losing positions are allowed to get out of control, then they can wipe out a score of successful profits and leave the individual with a huge loss on balance. It is just as important-nay, even more important-to know when to dessert a bad bargain, take one’s loss and count it a day, as it is to know when to close out a successful transaction which has brought profit.

LIMITS ARE A MUST

The staggering catastrophes which ruin investors, mentally, morally, and financially, are not contingent upon the difference between a 5 percent loss limit and a 20 percent loss limit. They stem from not having established any limit at all on the possible loss. Any experienced market operator can tell you that his greatest losses have been taken by those, probably rare, instances when he substituted stubbornness for loss limitation, when he bought more of a stock which was going down, instead of selling some of it to lighten his risk, when he allowed pride of personal opinion to replace conservative faith in the cold judgment of the market place. (more…)

Stubbornness

  
  Education
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If it doesn’t pay off the first time forget it.

Perseverance is a good idea for spiders and kings, but not always for speculators. Don’t fall into the trap of trying to squeeze a gain out of any single speculative entity.
Don’t chase any investment in a spirit of stubbornness. Reject any thought that an investment “owes you” something. And don’t buy the alluring, but fallacious idea that you can improve a bad situation by averaging down.

 

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