very often, our losing trades get stop out and price promptly reverses, distressing us immensely. happen often enough, we start losing confidence. we begin imagining that the market has singled us out to be the sucker of the day, week, month.
after a while, we outsmart ourselves, by reversing our trade positions once we get stop out only to see price again going against our this next trade. we cringe, get more frustrated and throw up our hands in disgust and despair.
so, what do we do when we encounter this situation?
for the case above, where i put on a short term trade...and get stop out, do i open an opposite position? it depends....
but let's first deal with the stop outs... stop outs are capital preservation mechanisms and a way to profit from the market in the long run... it is a cardinal rule of trading...without this risk management in place, soon, the trading account will be depleted and emptied...
thus, a stop out is either to limit losses or a way of acknowledging that my market outlook is wrong...
a) if it is a stop loss mechanism, then, my market outlook could still be correct, except that my entry point was flawed...if so, i may look for a re-entry based on indicators...
b) if my stop loss was activated becos data supports to invalidate my original market view, then, i may look for a entry point in opposite trade...
but, from experience, jumping from a long to a short, just becos my stop was reached, should be avoided for one main reason.... emotions... very often, we allow the stop loss to emotionally cloud our decisions and we click the mouse before we have time to re-evaluate the situation bcos we are bent on wanting to recoup that earlier loss... this is very human...we want to stem the pain from the first loss...usually resulting in adding fuel to the burning fire...
if we only begin a position by being able to accept that pre-determine loss, it is one way to be less emotionally affected by that loss, when it arises.
some things we can read all we want... but until we actually try it out, we wont ever really appreciate the written text...
so, i would suggest that you start off with small positions, allow time and trades to guide you to become a better trader... no amount of reading can offer you the real experiences that only the passage of time can... good luck...and stay positive...
we must stay positive becos rookies and seasoned players alike, we will also make mistakes... the differences between those who bring money to their bank and those who lose their houses n the long run will only be
a) having risk management
b) patience
c) technically more skilled
d) life long passion for this business to overcome the immense pain of losses at the beginning..
Sunday, March 7, 2010
Monday, March 1, 2010
Greed, Fear and Arrogance
Greed, Fear and Arrogance
1Mar2010 1740h +8 GMT)
by kennynah
Very often, the novice trader/investor enters a trade, giving it plenty of upside potential and insufficient attention to downside risks. This is a very natural, afterall, who ever enters a trade hoping for the worst to happen.
Still, the way to winning in the long run, is really to foremost measure the downside risks to every single trade before the proverbial counting of the chicks before the eggs hatch. It is counterintuitive but a necessary skill that every trader/investor must first acquire, if there is to be a chance of winning in this investment game. Simply put, learn how to lose before learning how to win.
To tackle this issue of learning how to lose effectively, one must come face to face with our emotions that accompany our trading/investing journey. We are humans, and as such, we are emotional beings. To imagine that we can truly remove emotions within ourselves is not realistic. Still, trading/investing while we are emotional can only hurt us more than benefit us. Thus, how then can we ever hope to resolve this conundrum within.
The simple answer is that we don't try to remove these emotions but manage them; the Fear, the Greed and the Arrogance within us. I am suggesting that trying to isolate such humanly features will be similar to attempting to stop breathing. We will suffocate. We just cannot hope to remove our humanly emotions. It is just not possible.
But we can successfully harness these emotions to our very benefit. We just need to first recognize them and come to accept what these emotions do to our trading/investing habits.
Let's begin with Greed.
How often do we allow winning trades turn into losses, only because we refuse to take profits off the table. How often, do we impose our beliefs that the market ought to reap us more profits than it would. It may not surprise you that often times, we allow Greed to dictate our trading/investing approach.
Given that SP500 futures on average move no more than 15 points within a day during low VIX reading, it is unrealistic to expect unrealistic gigantic moves. They do, at times, but we cannot trade based on unrealistic profit targets.
So, instead of allowing Greed to push us into believing that our winning positions can go on gaining, the moment we “feel” Greed creeping in, it is time to be alerted. It is time to quickly evaluate the technical/fundamental indicators and decide quickly if we should close off the position and take those rewards.
There is nothing worse than turning a winner into a loser. Allow Greed to signal you internally to sit up and look at the market intensely.
What about Fear.
Just like Greed, Fear can work for us, than against us. Fear is nature’s way of keeping us out of dangerous situations. Imagine that you are crossing the road and your attention turned to your ringing mobile. You answer the call and momentarily get totally absorbed in the call, unaware of your surrounding. Suddenly, in the corner of your eye, you see a flash and hear a loud horn. Chances are, you don’t freeze on the spot, you bolt and run across the road, regardless if it was really an oncoming vehicle speeding towards you. Your instinctive Fear takes over and you react to remove yourself from a precarious situation, even if that was really a tourist flashing his camera and the ice cream vendor on the sidewalk hawking his business. Of course, this is an exaggerated example, but hopefully, you get my drift.
If you get into a position that went adversely against you, you begin to feel Fear. Instead of turning that emotion to Hope; hope that the price will start moving for you, recognize the Fear as a signal for you to bolt out of your position. This feeling of Fear could save your account from certain death. Don’t second guess your instincts.
There are many opportunities for other profitable trades/investments, so long as there is still funds in your trading account. Learn to lose, before you learn to win.
Arrogance is not just a sin, it is a trading flaw.
We may get away with arrogance at work or with friends and family, but in trading, this characteristic will burn your trading account, very unforgivingly.
How do we identify this negative trading habit? It is easier than we imagine.
After we establish our trade, the position suffers a loss. The loss is not as large as to be stopped out by our predetermined loss exit point. We hang on, allowing the market to gyrate as it always does. But there will come a point when our stop loss is reached and if it wasn’t pre-ordered in, such as a hard stop but a mental stop, and we begin to waiver, that’s when we are being obstinate. We are being arrogant. We refuse to accept that the market is gently informing us that we have been wrong in our original outlook. We begin fighting against the market. We think we can telepathically turn the market around to our favour. We begin moving our mental stop loss exit, again and again, until the pain is so great we exit at a much larger loss than we originally intended.
Therefore, identifying arrogance in its multifaceted forms, such as being too eccentric about our imposed views of the market direction, will help us to realize when we are being obtuse. Arrogance is far worst a trading trait than Fear and Greed combined. Arrogance blinds us from becoming winners but very damaged losers.
Lose the arrogance, by knowing when we have become one.
Good luck !!!
1Mar2010 1740h +8 GMT)
by kennynah
Very often, the novice trader/investor enters a trade, giving it plenty of upside potential and insufficient attention to downside risks. This is a very natural, afterall, who ever enters a trade hoping for the worst to happen.
Still, the way to winning in the long run, is really to foremost measure the downside risks to every single trade before the proverbial counting of the chicks before the eggs hatch. It is counterintuitive but a necessary skill that every trader/investor must first acquire, if there is to be a chance of winning in this investment game. Simply put, learn how to lose before learning how to win.
To tackle this issue of learning how to lose effectively, one must come face to face with our emotions that accompany our trading/investing journey. We are humans, and as such, we are emotional beings. To imagine that we can truly remove emotions within ourselves is not realistic. Still, trading/investing while we are emotional can only hurt us more than benefit us. Thus, how then can we ever hope to resolve this conundrum within.
The simple answer is that we don't try to remove these emotions but manage them; the Fear, the Greed and the Arrogance within us. I am suggesting that trying to isolate such humanly features will be similar to attempting to stop breathing. We will suffocate. We just cannot hope to remove our humanly emotions. It is just not possible.
But we can successfully harness these emotions to our very benefit. We just need to first recognize them and come to accept what these emotions do to our trading/investing habits.
Let's begin with Greed.
How often do we allow winning trades turn into losses, only because we refuse to take profits off the table. How often, do we impose our beliefs that the market ought to reap us more profits than it would. It may not surprise you that often times, we allow Greed to dictate our trading/investing approach.
Given that SP500 futures on average move no more than 15 points within a day during low VIX reading, it is unrealistic to expect unrealistic gigantic moves. They do, at times, but we cannot trade based on unrealistic profit targets.
So, instead of allowing Greed to push us into believing that our winning positions can go on gaining, the moment we “feel” Greed creeping in, it is time to be alerted. It is time to quickly evaluate the technical/fundamental indicators and decide quickly if we should close off the position and take those rewards.
There is nothing worse than turning a winner into a loser. Allow Greed to signal you internally to sit up and look at the market intensely.
What about Fear.
Just like Greed, Fear can work for us, than against us. Fear is nature’s way of keeping us out of dangerous situations. Imagine that you are crossing the road and your attention turned to your ringing mobile. You answer the call and momentarily get totally absorbed in the call, unaware of your surrounding. Suddenly, in the corner of your eye, you see a flash and hear a loud horn. Chances are, you don’t freeze on the spot, you bolt and run across the road, regardless if it was really an oncoming vehicle speeding towards you. Your instinctive Fear takes over and you react to remove yourself from a precarious situation, even if that was really a tourist flashing his camera and the ice cream vendor on the sidewalk hawking his business. Of course, this is an exaggerated example, but hopefully, you get my drift.
If you get into a position that went adversely against you, you begin to feel Fear. Instead of turning that emotion to Hope; hope that the price will start moving for you, recognize the Fear as a signal for you to bolt out of your position. This feeling of Fear could save your account from certain death. Don’t second guess your instincts.
There are many opportunities for other profitable trades/investments, so long as there is still funds in your trading account. Learn to lose, before you learn to win.
Arrogance is not just a sin, it is a trading flaw.
We may get away with arrogance at work or with friends and family, but in trading, this characteristic will burn your trading account, very unforgivingly.
How do we identify this negative trading habit? It is easier than we imagine.
After we establish our trade, the position suffers a loss. The loss is not as large as to be stopped out by our predetermined loss exit point. We hang on, allowing the market to gyrate as it always does. But there will come a point when our stop loss is reached and if it wasn’t pre-ordered in, such as a hard stop but a mental stop, and we begin to waiver, that’s when we are being obstinate. We are being arrogant. We refuse to accept that the market is gently informing us that we have been wrong in our original outlook. We begin fighting against the market. We think we can telepathically turn the market around to our favour. We begin moving our mental stop loss exit, again and again, until the pain is so great we exit at a much larger loss than we originally intended.
Therefore, identifying arrogance in its multifaceted forms, such as being too eccentric about our imposed views of the market direction, will help us to realize when we are being obtuse. Arrogance is far worst a trading trait than Fear and Greed combined. Arrogance blinds us from becoming winners but very damaged losers.
Lose the arrogance, by knowing when we have become one.
Good luck !!!
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