The mental part of the game. Its an aspect of trading that can easily be ignored, we all choose how we approach this game. Some see failures as opportunities to learn and progress, while others see them as outright failures and road blocks which should be avoided at all costs. Its all about attitude.
I feel that trading should be ‘easy’ It should be effortless and without conflict. If we are going to be in this game for 20+ years. I feel its important to make the experience as easy as we can. We shouldn’t be ‘fighting’ with the market, in the boxing ring, hoping, fearing and stressing.
There is RISK management, but SELF management is equally as important. When we are actively trading the market, we are free to make buy and sell decisions whenever we want. The tough part is consistently making the correct buy/sell decisions. These decisions come with conflict!
Taking Profits
So this is the hardest part of trading. It can be made simple if we accept a few hard facts.
1. You will never sell at the top.
2. Your going to be wrong when you sell.
This is fact. As soon as you sell, the stock will probably keep going up. You may look at it 5 months later and its up 100% since you sold it. Point is, when you sell, your probably going to be wrong. This creates a conflict.
As humans, we do not want to be wrong. We seek perfection, we want to nail the top! It can help explain why people run up stocks 20% to watch them come all the way back down to break even. The reason why they did not sell is because they are afraid to be wrong. By selling you are forced to draw a line under your mistake. But being wrong in the stock market is inevitable.
From a practical level we can always sell half, and let the other half run. This creates a psychological win win situation. If the stock goes down, hey you locked in half.. and if it keeps going up, hey I still own half.
Taking Losses
It is amazing as humans, how we want to avoid mistakes. I do not know the exact reason. But I know that outside of trading mistakes and failures are not acceptable. Perfection is strived for. It is installed in us from an early age. In school we get rewarded for being ‘right’ we get good grades and if we are ‘wrong’ then we get bad grades, we are a dummy. Its a generally negative experience to be wrong. In the work place, if we are wrong we can be punished. If we fail we can lose our jobs etc.. you get the point.
In trading when a position goes against us. We would rather ‘give it a chance’ or wait for it to come back. We do not sell because we do not want to admit that we are wrong. It is much easier to build in failure to your trading strategy. ACTUALLY expect to be wrong. Fully accept that you will wrong be A LOT of the time. It is inevitable.
Reacting to Losses
So we have a string of losers… we follow our strategy perfectly, take positions in good quality names in sound consolidation patters. We have 5 positions open. One by one we get stopped out. We have a 10% draw down. How do you react to this? Do you feel mad, feel like ripping the face off your monitors? Want to make the money back!? It is at this critical moment that you have a very important choice to make.
You can get over aggressive, take on a gamble trade to try win the money back. You will most lilekly trade something not in your strategy at this point. You may also trade at the wrong time in the market. You feel mad, and have a loss. Your trading on emotion. However the market does not know you feel this way.. the market will just do what it was always going to do… most likley you will lose again. Say screw this and walk away from the machines. That is one scenario.
The second is you take a step back from the machine. You do your numbers, which are showing your batting average for this current time is down in the low 30′s. Your numbers are telling you to scale back. 2 things can be wrong here. “The market is hostile, or your selection criteria is wrong”. The exact steps to do now are almost counter intuitive. You must at this point SCALE DOWN YOUR TRADING SIZE. If you are getting stopped out of everything, the market could be at the start of a new correction. IF YOU SEE A PROMISING SET-UP. Take it with small size to test out the waters again! If you are wrong again, you are only wrong on a small position which will keep your profits intact!
The exact same approach goes for getting back into the market after a bear market/correction. The waters must be tested with small position size. Use the current volatile environment we are in right now. Would you want to be walking into 2-3% gap downs fully invested? This is how you sleep at night. Make your trading much easier. Test the waters with small positions, when those positions show you some decent gains… you can then step up the size and get more aggressive.
Your wrong a lot of the time
The big question is: Do you want to be right? Or do you want to make money? FULLY accept this part of trading. You are wrong a lot of the time. When you can fully accept this, many conflicts quickly dissolve. You no longer say, DAMN should have held it, or damn I should of sold it. You will no longer be afraid of making decisions in the stock market.
Very Insightful, thanks