Greed & Pride - How They Cloud Your Vision

Last Week I walked you through a hair raising experience - and showed you how I used my fears to my advantage.  This week I'm going to dig into greed and pride and continue with this month's theme of The 4 Deadly Sins of Trading.

Greed

Let's face it, every retail investor is driven by greed.  The key to success in retail investing is to feed your greed in healthy ways. This means you need to limit your risk and exposure!  One way to do this is to train yourself out of looking at dollar amounts and, instead, focus on the percentages involved on your trade.

For example, if a $1000 position pays you $100 of profit in 8 weeks, you have a choice in how you perceive the success of that trade.  Either you're going to look at it as $100 or you're going to look at it as 10%.  Both are technically accurate but, in my opinion, measuring this trade as a 10% profit is the healthier choice.    

Here is why I want you to look at this trade from the 10% perspective - you just increased your portfolio by 10% in 8 weeks!  If you get into the habit of growing your portfolio at 5% a month over the course of the year - you're going to be pretty happy.  

Your Number of Shares Is Irrelevant! 

Time and again people tell me "oh I like that stock, but it's too expensive for me!"

When I probe them on how much cash they've got available, though, it's always enough to get a few shares of that pricy stock.  I have found that many retail investors cling to the idea that if they can't buy 100 shares of something, they can't take that position.

While there's some merit in that line of thinking, I would personally rather have 1 share of a $700 stock versus 700 shares of a $1 stock.  Remember, expensive stocks are expensive for a reason!  Conversely, cheap stocks are cheap for a reason!  When you look at the price of a stock, you're looking at its perceived value from the markets point of view.

If you're still hesitant to follow that approach, keep in mind that option trades like credit spreads are a great way to get involved with an expensive stock, even if you don't have the funds to actually purchase that stock.  The point is, you should feed your greed by getting involved with stocks that are out competing the general market.  

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Use Pride To Your Advantage

Recently I wrote a post about a trade on $AVGO that went against me.  The biggest take away from that scenario is that I used my pride as a trigger to action.  In that case, the action was a post mortem on the trade that helped me learn why the trade turned out the way it did.

Unfortunately, most day traders and option traders will lose their entire portfolio within 5 years.  There are a number of reasons why this happens.  In some cases, there's a lack of education and understanding of the market.  In some cases, the risks involved weren't clearly understood by the trader.  I think that pride plays a role here too, though.  I have found even in my own circles that traders are hesitant to admit when they are wrong.  Without admitting your shortcomings, it's impossible to fix them.  

Think You Can't Be Wrong on a Trade?

Prove it!  Either the data on a chart proves your hypothesis, or it doesn't.  The worst mistake you can make is to start down the path of; I think, I feel, I hear, I hope etc about a trade.  

Keep in mind that a stock is only good if it's going up.  If you decide to trade a sideways or falling stock because of non-chart related data like, speculation of earnings or a new product launch, be aware of what you're doing.  It's perfectly OK to get involved with stocks for those reasons but don't fool yourself into thinking that it's a good stock.

The bottom line is that you have to be honest with yourself about what you're doing.  Remember, If it's a good stock it doesn't need to "come back" - it's already moving up!

Conclusion

Hopefully this post helps you get you pointed in the right direction when it comes to greed and pride.  Next week I'll finish off the theme by showing you how to balance the personailty of a stock with a few different trade strategies.  

As always, keep me posted with your thoughts on my blog topics and...

Happy Trading!