Wednesday, August 12, 2015

Using Fear & Hope To Your Advantage

Just a reminder for those of you in the Tampa Bay area - I'll be hosting a live presentation on my methods on September 19th that you're welcome to attend!  I'll be covering my process for selecting stocks and Ron Appel will walk us through some specific options techniques that can be used on the stocks my system produces.

If you would like to attend in person, we'll be hosting it at the East Lake Woodlands Country club from 9:30 AM to 12:00 PM.  We'll also be recording the session and we will make the material available for all attendees so that they can review it as much as they like in the future.  If you're interested, you can sign up for more information below:

Interested In a Live Presentation?




The 4 Deadly Sins of Trading: Fear & Hope

This month I'm breaking down what I consider to be the 4 Deadly Sins of Trading - Fear, Hope, Greed, and Pride.  Last week I gave you a brief overview on the topic and this week I'm going to dig deeper into fear and hope!  Let's jump right into how you can recognize when these emotions are taking over, and how you can turn them to your advantage.

Fear:


Before we talk about trading, I want to take you through an experience I had in the early 80's when I worked for the airlines.  What started as a routine flight into Boston turned into one of the scariest moments of my life!


I was in the back of the plane as the crew supervisor and it was the last flight of the evening so everything was pretty quiet.  If not for the quiet I may not have noticed, but the engines revved to a high RPM and then I felt the plane banking out of the landing pattern.  Just based on experience, I knew that the pilots had aborted the initial attempt and were lining the plane up for another approach.


A few minutes later, the same thing happened and at this point, my fear started to rise.  I glanced out the window and noticed that a massive bank of fog was obscuring the runway lights.  Knowing the dangers of Logan airport I started to worry about a potential water landing.

As an employee of the airline, my training kicked in and my fear moved to the back of my mind.  I was reminded of my responsibility to my crew and the passengers on the plane.  I had to prepare my crew for a possible water landing and make sure that passengers were strapped in safely.  I had to trust that my pilots possessed the know how to see us through this situation and when I accepted that - a sense of calm settled in on me.  I immediately started focusing on the things that I had control over.

I recognized my fear as a result of the abnormal behavior of the aircraft and I relied on my training to get me moving in the right direction.  As a trader, I recognize my fear when the behavior of a stock doesn't line up with my predictions.  So how do I get moving in the right direction? 

  • I pull up my trade plan (remind myself of what was I thinking at the time)
  • Consult my charts to see if my trade plan is still valid
  • If valid, I make sure that my contingencies are properly prepared
  • If there's something I've overlooked, I fix it ASAP

Scott O'Neil has a really interesting take on how fear impacts traders.  You can check out his video on it below: 






Hope: 

Plan for the worst...but hope for the best.  You're probably familiar with this phrase because so many people use it.  Unfortunately, the phrase is used so often because so many people ignore the common sense behind it!

In trading, when you choose a stock you're obviously going have hope that it will perform the way you want it to.  However, you can't overlook the realities of the world.  You've got to plan for as many outcomes as possible.  In my case, I like to prepare for every potential outcome on all of my trades.

To keep hope from leading me astray, I like to do a few things before I place my trade:


  • I work off of the 8 day EMA because it's the single most important measure of health for any momentum stock.  Now I don't have to rely on hope or guesses - the data is clear.
  • I open a separate chart that just focuses on the sector that my stock belongs to.  The sector chart is what I use to give me a heads-up on the intentions of financial institutions.  
  • I review charts on the direct competitors and related industries of the stock I'm looking at.  For example, if I'm looking at Nike, I'm going to do a quick check on Adidas and Reebok as well.  I'm also going to spend a few minutes reviewing the health of Footlocker!  

This is the type of pre-trade activity that keeps me from having to rely on hope to hit my goals!

Next week I'll dig into Greed and Pride to show you how to fully recognize their advantages too.


As always, Happy Trading!

DISCLAIMER



Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.


The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.


YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A LICENSED PROFESSIONAL. You understand that you are using this Information AT YOUR OWN RISK.