Emotional Trading
Keep Feelings OUT Of Your Trading!
Take a second to look at the 'choices' you have presented to you in the
buttons below ... Pay particularly close attention to the 'feelings'
reading each button label engenders.
Buy Quickly! How does that make you feel? Did you recognize an urge to
get in on the ground floor ... before the opportunity is gone?
Sell Immediately! Are you moved to quickly avoid some pending 'disaster'?
Think About It ... Do you notice a perceptible calming, almost
reassuring feeling that everything will be "okay"?
If you felt any of these feelings, you felt emotions which were generated
by stimuli which had their origins in things having absolutely NO significance
to anything real or genuine in your life right now. Rather, the stimulus
evoking these feeling were attached to prior experiences. Unrelated to
present situations, your past experiences 'colored' your perceptions of the
present. Under the right circumstances, that can be a good thing. It's
important to be able to recognize when opportunity or danger is present so
you can react accordingly. However, it is critical in our trading to be able
to control these emotions and recognize to what degree they can adversely
affect our trading decisions. If you've ever been in a trade which you have
later looked back and asked "WHY did I do that...?" then you've probably
experienced what I'm talking about. Emotions and trading simply don't mix
profitably!
I see the effects which emotions can have on our trading almost on a daily
basis in my online trading lab. New traders are particularly susceptible
to this phenomenon and often have to be constantly brought back to 'reality'.
I do this by talking them through real life trading situations which might
otherwise induce them to make common but no less incorrect assumptions and/or
decisions while trading. To avoid even getting into these situations, I use
a daily trading plan.
This plan is a complete outline of "how, when and if" to enter the trade,
what we'll do while IN the trade and how and when to exit the trade.
Here's an example of what I'm talking about.
BACKGROUND: Today's trade is a Bidirectional trade on Lennar Corporation.
The shares recently lost value on some negative business/market news. We'll
trade it whichever direction it confirms. Closing around $8.42, LEN shares
have a 5 day ATR (Average True Range) of around $1.49. We'll trade it either
way it begins to move, waiting for confirmation, of course before entering
the trade.
THE TRADING PLAN
GETTING IN:
- If the stock price CONFIRMS DOWN short the stock or buy an at the money put.
- If the stock price CONFIRMS UP at the open, buy the stock or an at the money call.
- If the stock GAPS UP, trade the back fill when it starts down (#1 above).
- If the stock GAPS DOWN, trade the back fill when it starts up (#2 above).
DEFENSE: Once you've entered the trade, immediately set a TRAILING STOP LOSS,
trailing by 50 cents on a stock trade and 25 cents if trading the options.
GETTING OUT: If and when you are satisfactorily profitable OR the stock
price has moved close to the ATR, tighten the trailing stop to around a dime.
You can either allow the trailing stop to take you out of the trade or simply
close the position to capture profit whenever you're satisfied. If this does
not happen today and you feel inclined to remain short overnight, be certain
that your stop loss will remain in effect overnight. This provides market
risk protection for the next trading day's open.
If you review the above trade plan carefully, you'll notice that it covers
virtually all aspects of the trade, from getting in, to getting out.
More importantly, it gives the newer trader a set of guidelines for what
do do "If ....", helping them to avoid those situations which can generate
a lot of emotion!
If you're not using a FORMAL trade plan of some kind, feel free to adapt
the one above for your use. As I tell the folks in my on-line trade labs,
"... Plan the trade, then trade the plan"!
Make it a great day!
Bob
