Trading Against Yourself

Pundits are always trying to predict what the market will do. I've come to realize that trading is a game you play against your self more than anything else. Once I came to that realization, this game became a lot simpler. I don't need to predict what others will do, to be successful I need only predict what I will do under certain scenarios.

I know that every trade I put on comes with the baggage of my prior trades.  That is why it is so important in my opinion to develop the procedural memory and trade consistently.

My trade journal is the best weapon I have against my self.  By posting the good, bad, and ugly I cannot deceive myself (or anyone else) into thinking I have it all figured out.  I need only to trade out of my play book and follow my rules and plan for the trade.  When I do that I avoid the self destructive tendencies and thoughts that are the sirens steering many traders to the rocks of ruin.

So what are some of those sirens:

• Fear of missing out on a big winner.

How many times have you been confident in a position and probably put on too much size only to see the trade not working.  So you wait a little longer because this could be the one.  Heck, you've probably counted the dollars you'll make when the stock doubles, triples or more.  It then trades down more and more and you wind up with a big loss.

I've been there. In fact, it was one such trade that caused me to start this blog in 2012.

• Fear of being wrong

How many times have you refused to sell a position for a small loss because you just want to get back to even. So we see if it bounces at a support level, and then the next one, etc...  Even though I know the first loss is the best loss, I still find my self doing that from time to time.  

I very narrowly avoided such a disaster earlier this month.  I was short LAKE at  10.30.  I thought hey, I'll just go in small wait a few days to the hype passes and then put on size when It starts to fade. Thank God I came to my senses during A.H. trading as I watched LAKE tick up.  It tripled  over the next few sessions. 

• Greed /Hubris

These ones always hits me when I'm on a winning streak.  The second I start thinking I can do no wrong,  and the market will come around to my way of thinking.  When I have these thoughts I've probably just bent a rule and am going to get my self in trouble.  

• Regret

I sold XYZ too soon or I should have bought it when I first looked at it. So I'll buy ABC because its the next XYZ.  This siren's call plagues many new traders.  I noticed a lot of the late comers in the EBOLA rally were coming into the later movers with these types of emotions and mindsets. How many people were saying that VRS, APT, IBIO, HEB, and OBCI were going to pull lake like moves and go parabolic.  I was more than happy to sell the dream to the late comers as I got into some of names early and out quickly. 

Regret, in my opinion,  is the easiest sirens for traders to overcome.  You need only realized there is always another trade, there will always be another opportunity,  there is not only one golden ticket.  

Those are the pieces we all have to contend with. Whether we choose to recognize and combat our self-destructive tendencies will have more impact on our success in trading than reading all the market headlines, guru recommendations or earnings transcripts.