In order to put your frantic mind at ease while you trade and give you some much needed sea-legs to stand on as you navigate the markets' stormy waters, you might want to tone down your bravado and think a little differently: Like a little old lady.
One of my worst habits as a trader is that once I am involved in a trade I tend to stare at my quote board, agonizing over every tick made by the stock I just traded. I share this habit with many traders but it is especially common amongst novice traders who do not have enough experience in the market to understand and feel comfortable with its movements. Anyone who has ever traded before can empathize with the feeling: You buy a stock at $85.50 for example, cringe the second it trades at $85.40, and rejoice as soon as the price prints $85.60. You watch this happen in a volatile market for about 10 minutes as the stock goes 30 cents against you, then 30 cents in your favor, back and forth, back and forth, up a bit, down a bit; all the while your cursor is tensely poised on the sell button. You nervously decide to sell, either for a small profit or you settle for a small loss and then the stock suddenly cruises up two dollars and you curse your timidness. Or, perhaps, you decide not to sell when the stock was a few cents in your favor and you could have taken a profit. It then plunges two dollars and you are left to lament a hefty loss.
It happens time after time, even after we have sworn that it will never happen again.
There Was an Old Lady Who Bought MDU...
My father has a very poignant analogy whenever I bemoan the impatience and anxiety that cost me a tidy profit by getting out of a trade too quickly. He will often remind me of how a little old lady is likely to trade and suggests that I try doing likewise.
The basic premise is this:
An old lady will invest in the market from time to time and may be holding on to certain stocks from around when Edwin LeFevre wrote his classic investment mock-memoir Reminiscences of a Stock Operator; which would be since the 1920's. All the while, this old lady is not fretting over the market, worrying about the news, or checking the ticker every five seconds. In fact she probably doesn't even think much about her stocks at all. Then one day, maybe because she had been casually keeping up with her stocks, or maybe because some associate from the firm in which her money is invested contacted her after taking inventory of their long inactive accounts, she finds out that those 500 shares of some auto manufaturer that her late husband had bought somtime after World War II are now worth 5,000 times more than when originally purchased. Overjoyed, the little old lady decides to finally buy that beachfront condo in Boca.
The obvious lesson in this analogy is that you need to see your trades through and that the right trade will garner the favorable result if you give it time to work in your favor.
Grant Me Patience (But I Want it RIGHT NOW!)
If you are a day trader you hardly have the time to while away the hours knitting sweaters for the grandkids, catching up on the soap operas, and playing bridge with the ladies at the clubhouse while you have tenuous positions on in the stock market. But, does a day trade necessarily have to be a five minute trade? One of the most critical qualities for a trader to posses is patience. This may seem counterintuitive in such a frenetic business, but it most certainly is true. Perhaps the most important aspect of patience is having the discipline to wait for a trade to come to you. Like a well thought out game plan, you need to come in early to work each day, having looked the night before at the charts for the stocks that you like to trade, and have a good idea of the areas at which you would like to make trades, from both the long side and the short side. Then, as the trading day unfolds, you must wait until your stocks get into the desired areas before making your trades. If you lose patience in your areas and jump on a trade before the one you had hoped for materializes, you run the risk of making an ill-advised trade that may force you to suffer through some unnecessary loses as the stock makes its way to your originally desired area. There is always the possibility that you will lose money even when you finally execute the trade for which you had patiently waited. If this happens, it just might not have been the right trade to make after all. When faced with the reality that you are in a bad trade, you should take your loss and look for areas to trade that stock again, either later that day or the next day. If you wait for stocks to get into the areas that you want them to, you will make money an overwhelming majority of the time. If you find that you are losing money even when the trades you want come about, then you are probably not reading the charts correctly, are not comfortable with the stocks, or are not being patient enough... which brings us to the second aspect of patience in regards to trading.
The Little Old Lady analogy best applies to when you are actually involved in a trade. If a large part of trading is about patience, then an equally large part of trading is about discipline. You acquire discipline through a consistency of thoughts, habits, and behaviors. One very important behavior (which I of course often fail to display) is that you need to approach each trade knowing how much you expect to make if you are right and where you will cover if you are wrong; and stick to those exit points. Once you do actually get your trade off, put in your stop order, whether it is $.50 against you or even $5.00 against you, and then let your trade do its work. You can then turn your attention to other stocks and other trades. If you happen to get stopped out of a trade, then you get stopped out. Move on to the next one.
If you spend so much of your time staring at the stock you just traded on your computer screen, agonizing over every tick, your uneasiness will get the best of you and right, wrong, or indifferent, you will make a hasty decision that will more than likely not be to your benefit. Plus you will not be putting your focus where it needs to be: the market in general. Another philosophy that my father preaches is that bad behavior begets bad behavior. If you make a bad trade or make a bad decision while involved in a trade, you are likely to jump too quickly into another trade, if for no other reason than to compensate for your previous mistakes. Acting in such a way is a surefire way to lose a lot of money.
The Blood, Sweat, and Tears Market
Everybody sing along with me, now (and if you don't know the song or the lyrics, look them up):
What goes up must come down
Spinnin' wheel got to go 'round
-- Spinning Wheel by Blood, Sweat, and Tears
If ever a business was a cycle of ups and downs, trading stocks is it. Like the name of the group that played the song quoted above, every trader has experienced his or her share of sweat and tears (and maybe even a little blood) while enduring the markets' vicious swings. Two things that are an absolute given in the stock market are that for one, it will go up and down, but secondly it is a cycle and you will see patterns repeat themselves.
My good friend Barry Cooper, not a trader but a success in business nonetheless, when asked his opinion of the stock market, harkened back to the great J.P. Morgan by profoundly proclaiming:
"The market will fluctuate."
Truer words have never been uttered and it is absolutely the one thing in all of trading that you can count on. You need to understand this when you go into a trade. It would be wonderful if you can buy a stock in the morning and simply watch it tick its merry way up from there until the end of the day. I can think of a few very rare occasions on which I bought a stock exactly on its daily low or sold a stock on its exact daily high. Numerous times I was very close, perhaps the stock pulled away a nickel or a dime from where I traded it before going my way. There have been at least an equal number of maddening instances when a stock got to within a few pennies of the price at which I wanted to make the trade and then went right in the direction I thought it would, leaving me out of the trade and out of some serious profits.
However, given the cyclical nature of trading, I know that trades made in good areas often repeat themselves. I can always sit down after the market closes or before it opens the next day, look at the trades that I either lost money on or misssed out on altogether, and revisit the ideal areas where trades can be made, knowing that I will have another opportunity for the right trade in the near future.
Tipping the Trading Scales in Your Favor
Usually I have to endure a little pain, as they say, on even my most successful trades. I often see a trade go anywhere from $.25 to more than $1.00 against me before it starts to work in my favor. Very often, if the trade begins by going against me, I will actually increase my position by buying more shares a bit lower than where I had originally bought the stock, thereby lowering my average price and giving me a chance for exponentially greater profits when the trade starts going my way. This trading method is called scaling and should be done carefully, only if legitimate areas exist slightly above (if you're selling short) or below (if you're buying) the price at which you originally made the trade, taking on small positions each time you trade. For example, let's say you think that a stock is a buy $65 and you want to have a position of 500 shares, but you notice other price points a bit below at which the stock can reasonably get down to before climbing upwards. In order to scale in to the trade, you should buy 200 shares at $65, 100 shares at $64.25, and then 200 more shares at $63.75, assuming that sufficient areas of support exist at or around those prices. In this instance, you can figure out appropriate stops along the way if you get nervous about losing money, maybe by selling out 100 shares before buying your final 200. Either way, you must know where your stops are and in the example given above, you should probably decide that you are completely out of the trade if the stock were to plunge below $63, finally acknowledging that that trade just did not work out in your favor. If the stock were to pretty much go right up after hitting your $65 price, well then at least you were in for 200 shares and can manage your profits as you see fit.
It is never a pleasant experience to see a trade go against you, even for a few minutes. You are literally holding your breath, waiting for it to go your way. If you are involved in a trade for 300 shares and it almost immediately trades $.50 against you, the trade has started out as a $150 loss. Truth be told, in trading parlance, a $150 loss is almost like a gift. Any seasoned trader, who has been involved in trades worth thousands, even millions, of dollars will tell you that they wish that they could lose $150 on their losing trades. However, when a young trader who has not had opportunities to really see the markets move and might not have ever really made a lot of money sees even modest losses, it can be very discouraging. To put it in perspective, four losing trades in a day, each totaling $200 (plus commission) equals more than what most young professionals a few years out of college take home in a week. Knowing that you might have lost that much over the course of only a few minutes can really turn your stomach. Believe me, I know, it happens to me all the time, and it can make a trader very nervous.
But, if you are patient, disciplined, calm, and practice good habits, you will be much more at peace with the market's moves.
Remember:
- You must choose your areas carefully when trading and wait for your stocks to get to them. If they don't, you should forget it and move on to the next trade, perhaps taking time to evaluate why the trade eluded you and where else you might be able to trade that stock. Understand that the market does indeed fluctuate and that any trade that you make will probably go against you by a little bit before it starts to work for you.
- Don't live and die by the tick on your quote board. It will only cause you anxiety over the trade you are in and keep you from paying attention to the markets and to other possible trades. Just put in your stop order and come to terms with your loss if the trade does turn out to be a loser. Knowing the general direction of the market will give you an idea as to whether you are making or losing money and you can then turn to your charts to see where you want to either take profits or cover your loses, provided you want to do so before getting stopped out.
- Always consider scaling in to a trade. I would recommend that any new trader take small positions on anyway, just so that you can get comfortable with the markets. If you have a good idea of the area where a stock should be traded but are not completely confident, then scale in bit by bit, buying or selling small amounts a few cents away if you happen to see sensible areas of support or resistance along the way.
Reflective Sidenote
Be very careful not to confuse being patient with being stubborn. Another bad habit of mine which I know I share with countless other traders is that I am often times very stubborn as well as impatient. I very often get involved in a trade and then hold my position for much too long as it continues to go against me. I reason that it has to reverse at some point and if I just hold my ground my trade will start working in my favor. It is a known aspect of the human psychological condition that we are much too willing to stay in negative situations for far too long, only escaping when we are past a breaking point and severe damage has perhaps been done. Think about all of the people who stay in bad marriages for so long and you will understand what I mean. These people are convinced that they are nobly staying the course and that whatever effort they are making to improve their situations will finally pay off. However, the situation rarely pays off and both parties in the failed marriage emerge emotionally scarred and resentful.
It is difficult for people to admit that they are wrong because it means that somewhere along the line they will have to cut their loses. When I stay in a bad trade for too long it is because I do not want to come to grips with the fact that should I exit the trade and forestall further damage, I will still come out of the trade a loser, therefore rendering the trade a waste. Nobody ever wants to feel that their efforts were wasted and the knowledge and perspective that we gain from our mistakes is rarely recognized as ample compensation. In circumstances such as this, we can convince ourselves that we are "patiently" waiting for the trade to work as we had expected it to but in reality we are only be stubborn and shortsighted.
Losing money is as much a part of trading as making money is. We need to accept that loses will occur and it is how we manage our loses that will determine whether or not we will be successful traders.
Setting limits and putting in stops are very disciplined and effective ways of managing our loses. Determining the areas where a better trade might be made is an extremely proactive way to make up for our loses. Scaling in to a trade is a very prudent means by which to cover ourselves should we not be 100% certain as to exactly where a trade should be made. However, when deciding to scale into a trade, NEVER keep throwing on more and more shares of a stock as you continue to lose money, with the intention of "getting back" at your loses and "wearing the stock down". Acting as such is in many ways similar to what the now infamous French "Rogue Trader" Jerome Kerviel did when he somehow recently managed to lose more than $7 billion for Societe General, the bank at which he was employed. Needless to say, this type of trading practice will only wear down your money, your nerves, and eventually your patience.
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