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The emotional side of trading is often ignored, yet it is a critical part of being a successful trader. Whereas long-term investors can actually forget about their positions at times, traders must stay aware. Today's Stock Brief focuses on the attitudes in the middle of a trade, when you've taken a position but have not closed it yet.
Here are six possible mental attitudes we all might go through after taking a position.
Here are some of Briefing.com's thoughts on each of these.
When you think, I made a mistake, the best thing to do is change your mind, and probably your position, even if it means taking a loss. The best traders on Wall Street are the ones capable of taking positions 180 degrees opposed to the ones they held previously. The alternative -- admitting you have made a mistake but waiting until you break even -- is a common way to waste a lot of time doing nothing. The better traders take the loss as soon as they admit it is a mistake and move on.
Why isn't this happening? This is a tough one, because clearly your understanding was different from reality. For investors, as long as you still believe in a situation, you can wait. But for traders, who are hoping for something quickly, it becomes important to move on from the "Why isn't this happening" thought to either "Did I make a mistake?" or "It is going to happen." Waiting in the nebulous "why" attitude is frustrating, but it also means you don't have an understanding of what is going on. Even if your understanding later turns out to be wrong, it's better to think you know what's driving a stock than to be stuck being puzzled. Presumably, you had an understanding when you took the position, but now you aren't sure. We realize it's hard to go back to a solid "it is going to happen" once you admit doubt, but if you can't do it, it's usually better, as a trader, to move on.
I should have taken a bigger position. We all know this one. You make the first part of a trade and suddenly it looks like a really good move. Any caution you had felt prior to the investment now seems trivial, maybe even "wimpy." Nevertheless, you shouldn't be hard on yourself. It's only greed coming out. Giving in to the temptation and plunking down an even greater position isn't always wise. Sometimes the second position, made at higher levels, doesn't work out, or even wipes out the profits from the first.
It can go even higher. Once you have paper profits, the realization that you might make even more is a heck of a temptation. It's common to us all. The main fear is that if you sell you'll be leaving some money on the table. But sometimes, you think this at the top. If you've ever postponed closing a position thinking it would just get bigger, and then lose the paper profits, you know what we're talking about. Better to leave some on the table, than to not take any home. This is what J.P. Morgan meant when he said, "I never knew anyone who went broke taking a profit."
I did this just right. Admit it, this just isn't human nature. It's the rare person who feels that their moves were executed exactly as they should have been. Unlike ballet or Olympic diving, there is no "10" score for investing. Despite what people brag about at cocktail parties or in chat rooms, no one gets in with a major position just before the big move, then gets out right at the top, and does it all the time. Thinking that there are people who do this, the Michael Jordans of trading, is a mistake. Even the best traders can't get the maximum out of a position without a good dose of luck.
It's better than I expected. This is another one that's rare, because let's face it, everyone's wildest dreams are usually beyond what actually happens. Furthermore, when something really good does happen, the first thought is usually, "I should have taken a bigger position!" Nevertheless, sometimes things work out really well, and you are able to close a position with substantially larger profits than you planned. If this happens, and you are actually able to think, "This worked better than I planned" give yourself some credit for restraining greed.
Of all these thoughts, "I should have taken a bigger position," is actually the best of the possible attitudes, and it is the one we hope all Briefing.com traders wind up feeling. It means you made money, and probably, you did it without being reckless. That's the best of both worlds.
Robert V. Green