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
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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
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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
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$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
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