Identifying the Emotion in Trading -- By: Bill Kraft
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
Most of us have learned that emotions can be a serious enemy of successful trading. Unfortunately, all too often, trades are entered and exited solely because of emotion. Thoughts like "if I buy XYZ, I'll make a bundle," or "XYZ went down 50 cents today, I better get out" are examples of entering for greed and exiting for fear without any pre-planning or underlying discipline. I have often thought and am personally convinced that in the short to medium term at least the markets are ruled by the psychological rather than the logical. In my book, "Trade Your Way to Wealth" , I place great emphasis on the need for discipline and the need and content of a plan. It is my contention that a trader can give himself or herself a better edge if they will follow the old adage of "plan your trade and trade your plan." To me that means map out the whole trade including the complete exit strategy before you ever enter. In that way, we can lessen the emotional pull and give ourselves a better chance.
After I sent out an alert recently, I received an email from a subscriber who advised that the stock I was trading was on his brokers "restricted list" that required a customer to call in and that made the subscriber "nervous about the trade." That email raised several important issues about trading. The first thing that jumped out for me was that I don't believe anyone should enter a position that makes them "nervous." When someone says he is nervous about a trade, it tells me that emotion is already operating in high gear -- the trader is afraid of losing and that fear is already in control. The nervousness is easily avoided. Either don't trade, or at least don't make that particular trade. The real question is how to remove the nervousness from the equation. The best way, in my view, is to have an exit strategy in place before ever entering the trade; know ahead of time where you are going to cut your loss before you get into the position. Every trade can lose so discipline the trade to cut the loss where you have made the determination ahead of time.
The next issue the email raised for me is who is the subscriber listening to and why? He was concerned because his broker had the stock I was discussing on some list that prevented the trader from making the trade on the internet and required him to make a phone call to place the trade. I'm not sure that the simple fact of having to make the call and talking to a live broker was the problem for this fellow or whether it was because he perceived some other negative from the requirement. One way to find out, of course, is to call and ask the broker why they have that stock on the "must call" list. It may simply be because it was a cheap stock. One of my brokerages requires me to enter a special PIN when trading the real cheapies, for example.
As I pointed out to the subscriber in my response to his email, many times analysts differ on their opinion regarding a stock. Where several analysts are covering a stock, it is quite common to have differing views sometimes as wide ranging as from strong buy to strong sell and anywhere in between. There is a disagreement every time an order is filled since the buyer expects the price to go up and the seller doesn't. That is why it is important for the individual investor to educate himself and make his own reasoned decision regarding entry to or exit from any position. There is, as I have often written, no holy grail of trading. No commentator, analyst, broker, or system is going to be right all the time. Trading is a business that is inherently risky. As I describe in "Trade Your Way to Wealth" , understand the risk, exercise sound money management, be aware of reward to risk ratios, have an exit strategy and plan your trade. If you don't do at least those things, you have every right to be and should be nervous about all trades.
For the record, I closed the trade that made my subscriber nervous in just 6 days and realized a before commission gain of 3%. Of course, it isn't always that way. The key is to prevent your emotions from ruling the trade.
Good Trading!
Bill Kraft
Success Trading Group -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
Trade Quality Stocks Over and Over Again
Over 300 winning trades and only 9 losses!
Register Now and Get $50 off our Normal Website Rate
Option Trader -- by Bill Kraft
Our Option Trading Service is for conservative traders that understand leverage principles and enjoy the challenge of options trading. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on always minimizing our losses! The Option Trader service utilizes standard trading in Puts and Calls as well as strategies using Leaps, Straddles, Credit Spreads, Calendar Spreads, and Naked Puts. But no matter how sophisticated a strategy may be, we ALWAYS know our downside potential on every trade.
Here's a look at a trade Bill is currently working on:
WR Grace & Co. (GRA)
GRA has been trending up since it broke resistance in February. Implied volatility is relatively low (around the 3rd percentile) and I am looking at the possibility of some in the money LEAPS calls. The delta on the 2010 25 calls, for example, is currently around .70. The spread on those 25's is about $1 wide so there should be some room to get a better deal than the $9.30 a share current ask. I'll be looking at the possibility of an entry early next week.
Good Trading!
Bill Kraft
Try our Option Trader Real-Time Alert Service
and Get $50 off our Normal Website Rate!
Achieve returns with us like 16.48% return in 5 days!
Trend Trader -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops. Here's a look at a trade Bill is currently working on:
NetApp, Inc. (NTAP)
NTAP has been consolidating following a retracement. I am looking for a break above the 20 day exponential moving average as a possible bullish entry.
Good Trading!
Bill Kraft
Try our Trend Trader Real-Time Alert Service
and Get $50 off our Normal Website Rate!
$10 Trader -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock. Here's a look at a trade Bill is currently working on:
US Energy Corp. (USEG)
$10 Trader was able to capture a 9.7% gain before a small commission in just a week on this inexpensive issue. As is often the case, USEG may be setting up for another entry as it appears as though it might be retreating toward the trend line again.
Good Trading!
Bill Kraft
Try our Under $10 Trader Real-Time Alert Service!
Dividend Investor -- by the Dividend Investor Team
Our Dividend Investor service focuses solely on the "best of the best" dividend paying stocks. We attempt to buy these stocks for their powerful dividend producing income; and we will also buy these with a purpose to make capital gains as the stock increases in value. Our Dividend Investor service is a perfect fit for an IRA account.
Register Now and Get $50 off our Normal Website Rate
