FEAR and HOPE ... Deadly Sins of Trading
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.
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.
- 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.
- 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