Pitfalls Encountered with Emotional Trades -- By: Bill Kraft
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
At one time or another, most traders, including myself, have traded
by emotion. In coaching sessions and in conversation with many traders
over the years, I have seen countless examples of emotional trades and
emotional trading. There has been one constant in those observations
and it is that those who continue to trade with emotion without some
discipline fail. Some of the emails I receive and some of the traders I
meet seem to think about buying a stock as they might think about buying
a lottery ticket. They go in with a euphoria, or at least excitement
that they are going to hit the jackpot. More often than not, they have
no exit strategy whatsoever, nor have they considered the risk or the
potential reward to risk ratio.
As I set out in my book, "Trade Your Way to Wealth" , successful
trading involves some self-examination and planning. In the book, I
talk about elements to include in the plan and the necessity of having
an exit strategy before ever entering a position. Adherence to a simple
plan designed for you can really give you a chance to become a better,
more successful trader. In the following material, see if you see
yourself in any of the examples and then ask yourself how did it work
out? A coaching client told me that his failures came from "the little
man behind the curtain." He pointed to the back of his head indicating
that the "little man" was that voice we have in our heads.
A while ago, I was talking to a guy who told me he bought a stock
because he "knew it would go up." Another fellow told me he was
buying a stock because he thought it would go up. Neither went up. Each
of those traders suffered real losses. What did they do wrong? They
approached the trades in "Pollyanna" fashion, "knowing" or believing
that the stock would move in a specific direction and ignoring a
decision on where they would get out if they happened to be wrong on the
direction. Why would they ignore the possibility that their stock would
go down? My guess is there were two reasons: first, a case of mild
euphoria about the big gain they would get (greed) and second, refusal
to recognize, or at least sublimating, an unpleasant emotion -- loss.
If we look at things rationally, wouldn't we agree that there is
literally no stock that couldn't go down? (If there is, please let me
know as soon as possible). Recognizing that any stock can fall in price
not matter what we think it will do might lead us to agree that an exit
strategy in the event we may be wrong on the direction makes sense. At
a rational moment, we can decide exactly where we will cut our loss. If
we fail to make that decision ahead of time, aren't we leaving things to
our emotions and aren't we more likely to listen to that little voice in
our head that says: "it'll come back" even as we go deeper and deeper
into the red?
Another example of emotional trading I have seen is the person who
grabs a profit as soon as there is one to grab. I've heard a trader
say, I took the profit right away because I was afraid I'd lose it.
After his exit, the stock moved another $30. The fear caused him to cut
his profits and miss another $30 a share. His exit strategy was "the
little voice." probably saying something like "Get out of this position,
remember the last time you had a profit and you let it turn into a big
loss. Don't do that again." Yank, the plug gets pulled. Would a more
disciplined approach yield a better result? My guess is in more cases
than not, it would. The idea is to cut losses, not profits and to let
profits, not losses, run. A predetermined exit strategy such as a
trailing stop as I discuss in the book, can keep you in the game through
little retracements and market chatter while limiting losses in the
event of a reversal. You can create your plan and then execute it so
that you simply follow a pre-determined exit strategy. Does that mean
you still won't have losses? No. Does it mean that you will always let
profits run throughout their whole move? No. It means you are likely to
improve your trading by limiting losses and giving yourself a better
chance to avoid cutting profits early.
Trading is not about hitting the lottery. It is about having the
gains add up to more than the losses. Successful trading involves
giving yourself a little edge. The "hot reactors" of trading do not
give themselves that edge. They tend to bet it all on black and though
they might hit every so often, they are not giving themselves any edge.
They are truly the gamblers while the pro traders make themselves the
house.
Bottom line is it is your money and your risk so you are entitled
to do it however you want. I prefer trying to get an edge, but I really
appreciate the hot reactors; they make life a little easier for me.
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.
Here is a play from the Success Trading Group:
MDU Resources Group Inc. (MDU)
Our Success Trading Group closed 2 more winners this week including
positions in Coca-Cola (Ticker: KO) and US Bancorp (Ticker: USB). We
purchased MDU Resources Group, Inc. (Ticker: MDU) near the close on Friday
and we like MDU at current levels for new positions.
Have a great weekend and we'll trade next week.
Success Trading Group Team
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Option Trader -- by Bill Kraft
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Here's a look at a trade Bill is currently working on:
Manitowoc Co. Inc. (MTW)
MTW appears to have found support at the $25 level on the
weekly chart after a fairly precipitous drop. Earnings are scheduled
for Monday after market close so there may be some volatility Monday
going into the announcement and Tuesday morning after the announcement.
Assuming no great surprises, I am looking at the Jan 2010 $20 LEAPS
calls with a premium under $12. The current delta on those in the money
calls is around .80 so there would be some decent leverage on an upward
move.
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:
ONEOK Partners, L.P. (OKS)
OKS has been rolling between about $54 and $64 and is now
nearing that $54 support. It goes ex-dividend on the 29th so a dip can
be expected. Earnings will be announced on 8/5. At current prices, the
annual yield from distributions is about 7.67%. I am watching to see if
I can find a good entry if there is an upturn following a dip.
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:
Airvana, Inc. (AIRV)
This stock has been in a longer uptrend since March and a
shorter uptrend since mid-June. It is currently dealing with a
resistance at the $6 level. If it can break through and hold above that
level, it appears to have an upside first target about 12.5% higher.
Good Trading!
Bill Kraft
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Dividend Investor -- by the Dividend Investor Team
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Here is a play from the Dividend Investor Team:
Health Care REIT Inc. (HCN)
Our Dividend Investor sold our position in Health Care REIT, Inc. (Ticker:
HCN) this week at $48.70. We had purchased HCN as an "invest" (ie, long-term)
position a few weeks ago, but with a quick 11% gain we elected to bank the
gain instead and watch for a possible re-entry point.
Have a great weekend and we'll trade next week.
Dividend Investor Team
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