Investing Psychology - Greed

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 pricey 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 it's 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 or debit 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.  

Use Pride To Your Advantage

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, an IPO or stock splits, news of mergers and acquisitions, 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 personality of a stock with a few different trade strategies.  

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




Happy Trading!

AMIN

Using Fear & Hope To Your Advantage 

 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 to land 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 and 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 I posted earlier today.  Save it and refer to it every time you get fearful with your trades.

 

 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 a 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.

1. I work off of the 8 day EMA (exponential moving average) or the 10 day SMA (simple moving average) 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. 
2. 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. 

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

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

Happy Trading!

AMIN

Investing Psychology - Fear

The 4 Deadly Sins of Trading

Your   Instincts   Are   a   Problem

In August, I'm going to talk through what I consider to be  "The 4 Deadly Sins of Trading "  - Fear, Hope, Greed, and Pride.  

For the length of my trading career, several of my mentors have stressed to me that I need to remove all emotion from my trading.  So I started coming up with ways that would help me to approach life with an almost Mr. Spok-like attitude.  Unfortunately, I failed because I just wasn't able to tune out all of my emotions.

Scott O'Neil, who I admire greatly, has a pretty awesome series of videos on this topic.  Definitely worth checking out so I'll be embedding them in my posts through this month.  

He's one of the proponents of removing all emotion, which I don't 100% agree with but I still recognize that there is a ton of merit in what he's saying.  However, I modified things to line up a bit closer with my own personality.  

My Alternative

I realized that there had to be a better way for me to do things.  A way where I could somehow use these potentially harmful emotions to my advantage!  I assumed this would be a risky adventure given that nobody else was talking about it, but I knew I had to pursue this for my own financial well being.

I also knew that my instincts and emotions existed within me for a reason.  It's because there's an evolutionary advantage to them!  Think about it, fear of risk is a useful tool for survival when you live in a dangerous world, full of animals that consider you to be a part of the food chain.  Our greed encouraged us to eat as much as we could in times of plenty which helped us survive through times of need.  Instincts helped keep humans alive and have been passed on to every one of us as a result.  

The Technique

I decided to start treating my dealings with markets the same way a Cro-Magnon man would deal with a world full of saber tooth tigers.  I began to nurture my instincts to limit their negative impacts in my trades.  

Training myself to recognize when I'm feeling one of these emotions was the first step.  For example, when I recognize that I'm feeling afraid, I force myself to take a deep breath and step back.  I wait a few moments for the fear to subside, and with a calmer state of mind I turn my attention to charts and data. 

Now, some may say that what I'm doing is actually still eliminating my emotions from trading but I think my unique perspective here gels better with my over all approach to living life. Using my emotions as a trigger to action makes me feel more in control of my trading, and that's a must for me.  Incorporating instincts into my process may be one of the smartest things I've ever done.

Wrapping Up

Now that I've gone through a basic introduction to my approach, next week I'll go through the specific dangers of Fear and Hope in trading - and how you can turn both into an asset.

As always, feel free to reach out to me if I can be a resource in your trading education.

Happy Trading!

Amin

Market   Condition

Currently market pulse on IBD (Investor's Business Daily) indicates Market is in a  "Confirmed Uptrend".  We have 7  "distribution days"  between the  $SPY  and the  $NASDAQ.  5 of those 7  "distribution days"  have piled up in the last two weeks.  That is worrisome and it makes sense to lighten up on some positions and raise some CASH.  Since the  "Follow Thru"  day of April 3rd,  $SPY  is  +28%  and the Growth Stock index  $QQQ  is  +37%.  That is an incredible performance in the market in the last 16 weeks.  $QQQ  lost its support at the 21 day ema (exponential moving average) during Friday's session.  It's just less than  -4%  away from the 50 day sma (simple moving average).  It is quite normal for the market to take a breather after gaining  +2.3%/week  on average since April 3rd.  Lots of leading stocks are consolidating their gains and building new bases from which to propel higher.

 

Game  Plan  For  The  Week

We are heading into one of the most volatile weeks of earnings report this week.  Last week  $TSLA  (+192% since April 3rd), dived  -10%  within days after the earnings report.  Stock was very extended prior to earnings report (it was +30% from it's 50 day sma).  It is always a good strategy to lighten up on stocks prior to earnings.  If your recent purchases of the stock is less than  +10%  prior to earnings, it would make sense to close out the position prior to earnings.  If you have been scaling into position with additional buys as the stock makes progress, look over your most recent purchases and evaluate it's progress as you approach the earnings deadline.

This week we have :

• $AAPL    (+52%), below 21 day ema
• $AMZN   (+57%),  below 21 day ema
• $DXCM   (+60%), Option call open interest at 440
• $FB         (+49%), below 50 day sma
• $GOOGL(+35%), Option call open interest at 1530/1550
• $NOW    (+64%), Option call open interest at 430/440/445
• $PYPL    (+86%), Option call open interest at 175/180
• $SHOP   (+159%) below 21 day ema

slated to report earnings.  These stocks have performed very well during current market rally.  Stocks that are highlighted, along with  $MSFT  account for  +45%  of the  $QQQ.  That is a very high risk in the market for the  $QQQ  to sustain it's uptrend if some of these leaders fumble during their earnings report.  I have indicated some of the risk factors along side each of the above stocks.  Stock performance since April 3rd is indicated in parenthesis.  Call option open interest implies where the market makers are pricing for the stock movement to occur.  Most of these stocks are indicating a modest gain of  +5%  or less.  Have a look at your stock positions and determine for yourself how much are you willing to risk for a modest movement in the stock during earnings.   

Review my post of June 28th where I have shown how  $AMZN  was scaled up with additional buys as the stock kept making gains.  Any additional purchases made after the last purchase on July 1st at  $2757.99,  ought to be closed off prior to earnings.  It would be healthy for the stock to consolidate between  2955  and  3155  and form a new base for the next move higher. 

Happy Trading

Amin

Check  Your  Greed  During  Earnings

The Game of Chance

Stocks are always dear to the outside public when prices are low and distrust prevails.  If they are bound to speculate, this is the very time when they ought to buy for a "long pull".  But they have no confidence and will not come in.

When a great movement has been projected, and the bubble has become inflated near its utmost tension, then it is that stocks look cheap.  People are imbued with the belief that the extent of the rise has no limit.  They rush in to buy and are supplied by the insiders, who have planned for just such a consummation.  The result is they get left.  Twenty, thirty or forty percent, margins are wiped out.  Or, if financially strong, they have to wait years, perhaps, for another boom to come round to let them out whole.

The saying,  "A fool is born every minute,"  is said to have originated with one of the most prominent operators in Wall Street.  Certain it is that a new crop of fools is always counted upon and seldom fails to respond to the allurements offered.  

Mr Jamie Catherwood (The Finance History Guy @investoramnesia.com) tweeted a week ago the above passage from 1887 book on  "Plain Truths about Stock Speculation".  His tweet resonated with me particularly in the current market.  $QQQ,  the leading Growth Stock index is  +41%  in the last 15 weeks since the  'Follow Thru'  day of April 3rd.  That's  +2.73% per week.  At this rate the the  $QQQ  would be  +142%  annualized.  We all know that is an unprecedented move and certainly not sustainable.  Our  GREED  sets in and we start to extrapolate the results of the movement in the stocks we own.  

How  Should  One  Decipher  Data  to  Check  Greed?

Use  Technicals  to  Guide  You

Earnings calendar for the second quarter is picking up pace this week with over 10% of the  $SPY  components slated to enter the confessional booth.  Last week  $NFLX (+45.8% since  'Follow Thru'  day of Apr 3rd) dropped  -7% during  earnings report.  They actually had an increase in total subscribers but the institutions still didn't support the stock.  Some institutions probably decided to harvest profits with part of their positions - just as we as retail traders do the same when there are profits of  +20%  to  +25%  in the stock.  This is one reason why one should never go into the earnings report day with the entire position.  

Here are some of the technicals to utilize to help guide you in assessing the risks of holding stocks through the earnings season.

1. Check and see how far the stock is from the 50 day (sma) simple moving average.  Ideally it would be best if the 50 day sma is closer to the 21 day ema(exponential moving average).  Further away the stock is from the 50 day sma, greater the risk one has should the stock drop to that level.
2. Check to make sure your stock is the leading stock and trading above the 21 day ema.  If it is trading at 8 ema or 10 sma, it reflects momentum of the stock.  That's a leading stock.
3. Stocks tend to move closer to where the open interest with options on the stock is trading at.  Most stocks tend to show an open interest at the $10 level above or below the closest monthly or weekly option chains.

Following is what I find looking over the 8 leading Growth Stocks that are reporting earnings this week.  Use that as a guide to help you decide how much of a risk to take off prior to earnings.  It's so easy for us as retail traders to get our emotions spiked during earnings and think that the stock would go all the way to heaven.  Stocks go up in a stair stepped fashion.  They go up and rest for a while building a flat or 3 weeks tight or a shallow cup base.  Sometimes the stock may consolidate for several weeks before making the next move higher. 

Looking over the technicals, I would consider stocks in red and in bold letters (bottom 4 stocks) to be at a higher risk and would reduce holdings through the earnings report.  I am indicating how far the stock is from the 50 day sma in %.  Farther away it is from the 50 day sma, greater the risk should the stock pull back to the 50 day sma.  It's quite normal for the stock to test that level when it has made substantial gains since the  'Follow Thru'  day.  In parenthesis are the Call Options with the highest open interest.  That is what the market makers are expecting the stock to move towards.

1. $CMG   ... 8% (1130/1140/1150)
2. $PETS  ... 10% (40/50)
3. $TMO   ... 10% (390/400/410)
4. $TXN    ...  8% (135/140)
5. $ALGN  ... 17% (320/330)
6. $IBKR   ... 20% (55/60)
7. $ISRG   ... 15% (650/660)
8. $TSLA   ... 30% (1500/1520/1530/1540)

Happy Trading!

Amin