News events in particular cause traders to make incorrect decisions, because they play on emotions. The urge to follow the crowd is normal. It is comforting. And in a strong bull market, it may just be correct.
But in most circumstances, letting emotions push you into making trading decisions costs traders money.
There are two kinds of traders.
1. Those who make emotional decisions based on any of the above.
2. Those who make money off of those who make emotional decisions.
Does boredom cause you to do silly things? If so, you’re certainly not alone.
More and more I see traders make simple mistakes primarily because they are bored with what they are doing NOT because they don’t know what they’re doing.
Contrary to popular opinion, traders and investors often do get bored. I know I certainly have. After all, if you’re doing it correctly, good trading and investing should be both boring and routine. If that’s not the case for you, it probably is because you’re either trading far too aggressively (i.e. the gambler) and/or you have no risk management skills whatsoever.
In my experience, most humans and including those of us who are very disciplined and focused, will from time to time seriously crave to change things up a little. No one, including me, likes to do exactly what they need and should do every day. Most of you are no different than me. The problem is that when we both get bored, very bad things tend to happen if we don’t first realize that our trading and investing is being negatively impacted by boredom and do something about it.
For example, in my experience traders tend to either disconnect from the market entirely (which can be dangerous with positions open or lost opportunity) or they do the exact opposite by increasing their overall risk to “make it more interesting.” Likewise, investors tend to become far more active (i.e. they turn into traders and churn positions) just to do something to keep themselves preoccupied or they buy and sell stocks that normally they wouldn’t even consider. In either case, neither one tends to work very well.
When you start to see the signs that you are becoming bored and have the urge to do something “different,” I recommend mixing things up a little. For example, when I become bored with my trading and daily routine I often do the following which seems to help:
Head to the gym (intense and exhausting exercise is the best cure for boredom I know)
Mix up the daily routine (I like to flip my day around and do things I usually do at the end of the day first)
Try to learn something new (I often try to study a different sector/different market now, but in previous years I would enjoy playing around with a new indicator or two)
Read about something you know nothing about (if you do this, you’ll be amazed by how much it will stimulate your brain)
Take some time off and do something else (while I always have a long “honey-do” list to keep me busy, that’s also why there are golf courses!)
Now, for those of you who make a living trading and who feel they cannot leave the game for an hour, much less an entire trading day, I have some suggestions for you as well: (more…)
1 Greed, the urge to make as much money as possible, and fear that he will lose it all.
2 Low confidence in himself or his strategy, which makes him enter or exit trades at the wrong time. Low self esteem is also a problem; lots of people are natural victims and believe that they will probably fail, and of course this is what they do.
3 Middle class guilt that makes the trader believe that he should not make super profits because it is morally wrong.
4 Overconfidence. Feeling that after so many winning trades he is invincible.
5 Disbelief. He believes that high rewards cannot possibly be true, and “If trading is that easy, then everyone would be doing it.” He then looks for complicated strategies in the belief that it cannot be easy.
6 Paranoia, believing that the market is conspiring against him.
7 Reward for effort, where he feels that people should be rewarded fairly for the effort that they put in. FX trading does not operate with these rules and that is confusing. The reward can be disproportionately high or can result in punishing losses, and is not dependent on just the work put in.
8 Insecurity, resulting in changing a strategy that is actually winning. All strategies must be tested and then consistently applied in order to engender confidence.
9 The urge to trade simply because he is a trader. This impatience results in entering trades when no real opportunity exists.
10 Low expectation; people with a low expectation of life tend to be less successful. Even though they may be highly intelligent, they aim for less and settle for less. (more…)
An excerpt:
…predictions are a way of demonstrating knowledge. Of course, in most things, a successful demonstration involves being right. In golf, a good argument will suffice. Most compellingly, human beings are wired to predict. In ancient times predictions served as psychological counterweight to the extreme uncertainty of life. As we’ve gained more control over daily existence, predictions help encourage the illusion that we are in charge of our own destiny. The more that is unknown, the greater the urge to predict. As the recently departed futurist author Ray Bradbury once said, “Mysteries abound where most we seek for answers.”
If you can find yourself comfortable not trying to predict daily life (and trading) there is a nice reward for you.
When we follow a standardized process for trade execution, we help negate the impact that emotions can have on that process. And when we create a set of rules within which is a subset of rules that allow for less mechanical, more intuitive management of our trades, we can potentially realize additional profits from those intangible insights into market direction without over-exposing our account to risk. Here is how it works:
S – Scan your charts . Create a “Watch List” to help manage your inventory of trading opportunities.
I – Identify a high probability set up.
M – Map out the trade’s entry point, stop-loss exit point, and profit exit point.
P – Pull the trigger. By systematizing the process as we are talking about here, the anxiety associated with executing a trade is greatly reduced. Instead of focusing on whatever issues keep you from pulling the trigger, your focus is on following a procedure, a set of instructions. Mapping out and understanding exactly what our risk is also reduces the anxiety of entering a trade.
L – Let the market do its thing. It’s not very often that you won’t have to take some heat on a trade. It’s a great feeling when a trade goes in your favor immediately and stays that way. But that’s the exception and not the rule. As a good friend of mine would say, “Let it breathe!” (more…)
Turn off the news.
If you’re not feeling well for whatever reason, take the day off.
Feeling overly confident? Decrease your size.
Waffling on a trade? Pull the trigger! The hardest ones are usually winners.
Resist the urge to take off half when a trade is going your way.
Have a target in mind for every trade. Exit when price approaches that level.
Support, resistance and targets are ‘areas’, not specific prices. Give them some leeway.
Trade in the direction of the Cumulative TICK.
Unusually strong/weak Cumulative TICK? Increase your size.
Use mental stops. Adjust your stops based on the current volatility.
Establish a total maximum loss you’ll take in one day and stop trading if that’s hit.
Be conscious of your self-talk. Maintain a positive inner dialogue with yourself.
Markets are notoriously hard to read and people see only what they themselves want to see.
Bulls will find reasons why certain stocks will go higher, while at the same time, Bears will find many reasons for the same stocks to go lower.
The seldom-admitted truth is that most of the time, markets exist in some indeterminate state!
The main thing is that you cannot trust consensus and you cannot rely on the “Establishment.”
You can’t find refuge in the herd and you must resist the urge to join the crowd.
Your passion of the moment will most certainly create a disaster over the years!
On the other hand, if you do stick with the following five essential truths, you do stand a better than average chance to invest profitably:
1. Markets are unpredictable and ill-suited to forecasts.
2. Long-term fundamentals are key.
3. Investor emotion leads to volatility.
4. Valuation discipline should guide investment selection.
5. Perspective and patience are always well rewarded.
Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analyses, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
