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Two Emotions

  
  Education
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Two emotions that plague the inexperienced trader are Anticipated Loss  and Buyers Remorse.

Does your trading life go something like this? You see a trade line up, and suddenly a cramp in your solar plexus appears as you anticipate a possible loss. You put this down to simple fear and make an effort to mentally overcome this internal barricade so as to enter the trade. Acting quickly so as not to miss out, you swiftly enter the position and your trading platform indicates that you are filled. Now you are gripped by the sensation of buyers remorse – too late to back out now… A small voice in the back of your subconscious says “what have I done?”

To your great delight and surprise, the trade soon goes in your favour, and for a while you feel a warm fuzzy glow and give yourself a little compliment, but soon the old feeling returns in the form of a hot flush. Anticipated loss is back again as you worry about the market turning against you and taking away the profit you now have. (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.

Two Emotions

  
  Education
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Two emotions that plague the inexperienced trader are Anticipated Loss and Buyers Remorse.

Does your trading life go something like this? You see a trade line up, and suddenly a cramp in your solar plexus appears as you anticipate a possible loss. You put this down to simple fear and make an effort to mentally overcome this internal barricade so as to enter the trade. Acting quickly so as not to miss out, you swiftly enter the position and your trading platform indicates that you are filled. Now you are gripped by the sensation of buyers remorse – too late to back out now… A small voice in the back of your subconscious says “what have I done?”

To your great delight and surprise, the trade soon goes in your favour, and for a while you feel a warm fuzzy glow and give yourself a little compliment, but soon the old feeling returns in the form of a hot flush. Anticipated loss is back again as you worry about the market turning against you and taking away the profit you now have. You watch the current candle as it bobs up and down… You stare at it in a trance as the feeling of being gripped by a giant hand increases. You struggle for a moment against this sensation, but then it overcomes you and you exit the position. Price moves on without you, and you are filled with buyers remorse again! On and on it goes, slowly eating away at your confidence and sanity.

Here’s what it feels like once you overcome this hump :

Having been watching a dull market for several days from the sideline you suddenly see a trade shining out on your chart. You have an initial “ah ha!” sensation, but you let that go so as to think carefully and not do anything rash or impulsive. You decide to take the trade, and spend some time calculating the correct entry and stop position; you know your standard 1R risk value already. Having checked and double checked that everything is ok, you enter the orders into the market and fill out the necessaries in your trading log, including entry time, size, reason for entry etc… Then you switch off to go read your favourite novel or walk the dog.

The next day, you check the market to see that your order has been filled and the market has moved in your favour. You think “good…” and examine the chart for the correct new stop placement, and you adjust your order in the market. You switch off and go do something else.

3 more days of these quick adjustments follow, and your profit increases with each surge, but on the forth day you check to find that you have been stopped out during a sudden reversal for a profit of 2.6R… Nice trade. You fill out the rest of the entry in your log, and then assume the attitude of sitting on the sidelines again for the next trade.

Now – the thing to bare in mind in the above examples as that both people might be TRADING THE SAME MOVE…

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