hi all,
below is an article obiwan(from chatroom) sent to me and its being posted here for all to view.
V.interesting indeed obes!
Cheers
EMOTION = The difference between profit & loss
What is the magical element that differentiates the winners from the losers on the markets?
Why is it that some people succeed and make money whilst others fail and lose money even when they are playing the same stock?
The answer for Pat Quinn full time trader with his business partner Shane Archer, is obvious. “Buying stocks is the easiest thing in the world, but selling them at a profit and doing so consistently requires a strategy and above all else the discipline to enforce it.”
The stock market operates on two basic emotions, Fear versus Greed and unless people adopt a strategic approach that eliminates ‘emotion’ from their decision making process, they will surely end up giving a substantial amount of their hard earned Capital to the markets.
“Uncomfortable though it may be for people to realise it, to find the cause of the majority of their problems they need look no further than the nearest mirror. As far as I know there is no way anyone can force someone to buy a stock, so you only have yourself to blame or congratulate depending upon the outcome of your actions.”
Let us look at a simple ABC approach and in this instance we will use the letters that could well stand for Always Be Careful.
A) WHAT HAPPENS WHEN THE PRICE RISES/FALLS AS PREDICTED?
The sole reason people open a position in a stock is because they believe that the price will rise or fall, but let us look at the emotions that come into play when it does.
Whether you are short or long, the further the price moves, the more you have to lose, (how else do you think that the hit TV series ”Who wants to be a Millionaire” works?) people must have a strategy in place that will lock in their profits and minimise their losses. Remember the price will not carry on rising or falling forever.
From experience the most effective way we have found is to operate a running or trailing stoploss that we bring in tighter as the graph gets steeper. We generally set a stoploss based upon the extremes of the normal intra-day patterns of an individual stock and build in a small ‘grey area’ depending upon market conditions. Our normal stoploss lines can be anywhere from 5 -15%. This line is put straight onto our graph as soon as we have bought into a stock and effectively establishes our parameters, our ‘golden rule’ is that if the price drops below this line it is sold immediately. As the price moves upwards we drag the stoploss up with the price line thereby locking away any profits that are ‘stored’ underneath our line.
If the price line moves sharply out of pattern, the likelyhood is that it will move just as sharply in the opposite direction as the market has a tendency to always overreact, so we tighten our stoploss in to as tight as 4%. This effectively locks in the maximum profits when the price line reverses.
We are well aware that to some people the whole subject of stoplosses is contentious and our attitude has been decried many times in the past. We strongly suspect that some of our more voluble detractors, who have been curiously quiet in the last year’s volatility, have sought employment in other more productive areas.
B) WHAT HAPPENS WHEN THE PRICE DOES NOT MOVE?
We have all done it, jumped aboard an absolute screaming certainty merely to find the graph ‘flatlining’ to the point where you keep checking to see if your system is still working.
Hey, if you could get it right every single time you would be the richest man on the planet in no time! The secret is by adopting a strategic approach and sticking to it, you can hopefully get it right more times than you get it wrong and thereby pull ahead.
Your decision must now be ‘how long can you afford to wait?’ With a strategic spread of your stocks, you should not be dependent on any single stock winning for you. Depending upon your chosen timespan, you may decide to wait a while to see if the market maker has a large buy or sell that he is holding back either later in the day or after market close. Your decision will be influenced by your patience, your experience, other opportunities and the pressure upon your finances. Just take care not to over trade.
To predict the future, look to the past and study the graph carefully to see how the price line reacted in similar market conditions in the past. A useful note is to put up the News items on the graph to judge the price line performance. Our graphs are smothered in notes that we have made giving market conditions etc; when we have bought into and sold out of stocks in the past that often prove invaluable in predicting market maker reactions and price movements.
The quick answer? Only time and experience will tell you how to react to this one.
C) WHAT HAPPENS WHEN THE PRICE REVERSES SHARPLY?
If you had to pick one characteristic that is common amongst successful traders in all Markets, Countries, Colours, Creeds, Ages, Shapes and Sizes, it would be discipline.
The only difference between the winners and the losers in the markets is that when a price drops, the winners adhere to their strategy and sell and the losers become paralysed.
Remember that the sole reason for taking a position was to make money, now let us look at the psychology involved when emotion plays a part in the decision making process and run through a only few of the thousands of well worn excuses for holding losing stocks.
“It can’t carry on dropping/rising as steeply as that”. . . . . rabbit in the headlights approach.
“I have decided to wait for the bounce”. . . . ignoring it will NOT make the problem go away.
“This stock owes me too much money”. . . . . resentment is an expensive reaction.
“The market makers have got it in for this stock”. . . . the good old conspiracy theory.
“The market does not recognise the true value of this stock yet”. . . hope doesn’t pay bills.
“I have not actually made a loss until I sell the stock, it will come back”. . Irish school of Logic
“The price is well under the NAV, it has got to bounce back sooner or later”. . . Oh really?
“I bought this stock for my long term portfolio”. . . . . . . . Yeah right!!!!!
The single reason for the majority of people’s losses can be attributed to lack of discipline. Either they have not had the discipline to research their stock thoroughly and outline a strategy before investing, or they have not implemented strategic stoploss lines or locked away profits.
The successful trader utilises a strategic approach that eliminates emotion from the decision making process completely. They deal in cold hard bottom lines and nothing else, they regularly review their performance with a sharp analytical eye dealing only in facts not theories, hopes, intuition or rumour.
They listen to analysts, ‘experts’, journalists, monitor the media and also note opinions on bulletin boards etc: However, their investment decisions will be based on their own opinions formed by their own knowledge of the stock, noting ‘actual volumes’ of trade, accounting for the ‘herd mentality’ of the market and always waiting for the price line to confirm it’s direction before investing. Unlike many ‘emotionally driven’ investors they also take into account the underlying market trades which will not show up on trade analysers etc:
Traders deal only when the balance of probabilities is in their favour and have the discipline to wait until the risk/reward ratio offers the opportunity to achieve a reasonable percentage gain in relative safety. The degree of discipline required NOT to trade when conditions are unfavourable is nearly always underestimated and the inexperienced will find themselves feeling that they ‘have’ to trade because everyone else is and they are missing out.
The other side of the coin is having an unshakeable belief in “your own” individual proven strategy that gives you ability to act with complete conviction the instant that your selected stock meets your criteria. You will note that I have highlighted “your own” because I would ask the reader to bear in mind that they will be dealing with their own money in the final analysis. I cannot stress highly enough the fact that every individual must prove their own strategy which they will adopt to suit their own requirements.
There is also the temptation to ‘chase’ after stocks that you discover that you have missed and are nearing the end of their run. Only study and experience will give the trader enough confidence in his/her own strategy to judge entry and exit points accurately on a given stock.
Only a very small percentage of traders actually beat the market with a degree of consistency that permits them to live off their gains whilst retaining their Capital.
In order to attain membership to this ‘minority’ it is imperative that the trader learns to put in place a tried and tested strategy that will completely eliminate emotion from the decision making process. I strongly suggest that everyone paper trades their strategies first in order to prove consistency before attempting it with real hard earned cash.
It is worth noting that the experienced trader will have their entry and their exit points mapped out prior to buying into a stock. Once they have bought into the stock, generally their first action is to get their sales/purchase order on their screen ready to close their position should the stock move contrary to their predictions.
In order to exclude emotion from exiting an extremely profitable stock, one strategy we use is to sell the stock as soon as your profit level reaches a point which makes us uncomfortable. Because we trade primarily in cfd’s in short term trading, re-entry is not only inexpensive, but it immediately eliminates the ‘worry’ element of substantial profits and if the trend continues as expected, profit will begin to stack up again without the associated stress.
Consistent returns are generally only obtained by leaving the ‘higher risk’ early strikes to the brave and most traders have exited a stock once the rate of advance/decline starts to slow. They also have a strict time frame in which these target percentages have to be achieved and are relatively dispassionate in disposing of lack lustre performers in their portfolio.
If you want to bring emotion into the equation, there is nothing as emotional as seeing your hard earned Capital evaporating at an alarming rate. Remember the experts and analysts, journalists and media commentators still get paid whether they are right or wrong. Where will the ever invisible bulletin board maestro’s be when the bills land on your doorstep with a resounding thud demanding to be settled?
When I can pay my bills with potential, settle my accounts with hope, placate my Bank Manager with promises of ‘upcoming orders’ and feed my family with positive outlooks then and only then can I afford to allow emotion to play a part in the trading equation.
I apologise if this article does not supply the reader with the latest greatest ‘get rich quick’ formula, but hopefully it will help people to preserve their Capital by facing up to the cold hard realities of trading before they lose their money. It should also give the reader some insight into the very profound effect emotion has upon their decision making process.
So finally, is the successful trader a cold calculating unfeeling individual who sits staring blindly into his screens like a computer driven robot? Does he spend countless wasted hours just waiting endlessly for the right conditions to present themselves?
From my experience the vast majority of traders are a fairly easy going amicable bunch of people who whilst demonstrating undoubted abilities, are more than happy to exchange strategies and contrarian views on both individual stocks and markets in general.
There are a small number of people who have finally managed to learn and accept the cold hard fact that there is nothing personal in trading stocks.
They freely acknowledge that they cannot hope to move either an individual stock or the market itself, but do exchange views, strategies and tactics fully and freely to mutual advantage. Where can these people be found? http//www.trade2win.co.uk
Here I have found people with a degree of unselfishness that is unfortunately all too rare in today’s “I am all right Jack” society. The chatroom has regulars who possess a wealth of knowledge on individual stocks, markets and trading strategies and have no hesitation in sharing this with others with a high degree of impartiality and ethics.
Unlike bulletin boards, where petty politics and backbiting all too often prevail with little or no policing of antisocial behaviour, this site is strictly policed to the benefit of all. I have benefited considerably from the generosity of some individuals who have chosen to share their experience and strategies with me and see no reason why anyone else cannot gain the same benefit.
Everyone and I do mean everyone, can benefit from acknowledging the fact that they are still learning from the markets and can do so with a far higher degree of safety by talking with others in the same field.
In conclusion, my first suggestion to all ‘wannabe’ traders is look long and hard at yourself, your personality, discipline and self control before attempting to trade stocks because that is where 90% of your problems will come from.
below is an article obiwan(from chatroom) sent to me and its being posted here for all to view.
V.interesting indeed obes!
Cheers
EMOTION = The difference between profit & loss
What is the magical element that differentiates the winners from the losers on the markets?
Why is it that some people succeed and make money whilst others fail and lose money even when they are playing the same stock?
The answer for Pat Quinn full time trader with his business partner Shane Archer, is obvious. “Buying stocks is the easiest thing in the world, but selling them at a profit and doing so consistently requires a strategy and above all else the discipline to enforce it.”
The stock market operates on two basic emotions, Fear versus Greed and unless people adopt a strategic approach that eliminates ‘emotion’ from their decision making process, they will surely end up giving a substantial amount of their hard earned Capital to the markets.
“Uncomfortable though it may be for people to realise it, to find the cause of the majority of their problems they need look no further than the nearest mirror. As far as I know there is no way anyone can force someone to buy a stock, so you only have yourself to blame or congratulate depending upon the outcome of your actions.”
Let us look at a simple ABC approach and in this instance we will use the letters that could well stand for Always Be Careful.
A) WHAT HAPPENS WHEN THE PRICE RISES/FALLS AS PREDICTED?
The sole reason people open a position in a stock is because they believe that the price will rise or fall, but let us look at the emotions that come into play when it does.
Whether you are short or long, the further the price moves, the more you have to lose, (how else do you think that the hit TV series ”Who wants to be a Millionaire” works?) people must have a strategy in place that will lock in their profits and minimise their losses. Remember the price will not carry on rising or falling forever.
From experience the most effective way we have found is to operate a running or trailing stoploss that we bring in tighter as the graph gets steeper. We generally set a stoploss based upon the extremes of the normal intra-day patterns of an individual stock and build in a small ‘grey area’ depending upon market conditions. Our normal stoploss lines can be anywhere from 5 -15%. This line is put straight onto our graph as soon as we have bought into a stock and effectively establishes our parameters, our ‘golden rule’ is that if the price drops below this line it is sold immediately. As the price moves upwards we drag the stoploss up with the price line thereby locking away any profits that are ‘stored’ underneath our line.
If the price line moves sharply out of pattern, the likelyhood is that it will move just as sharply in the opposite direction as the market has a tendency to always overreact, so we tighten our stoploss in to as tight as 4%. This effectively locks in the maximum profits when the price line reverses.
We are well aware that to some people the whole subject of stoplosses is contentious and our attitude has been decried many times in the past. We strongly suspect that some of our more voluble detractors, who have been curiously quiet in the last year’s volatility, have sought employment in other more productive areas.
B) WHAT HAPPENS WHEN THE PRICE DOES NOT MOVE?
We have all done it, jumped aboard an absolute screaming certainty merely to find the graph ‘flatlining’ to the point where you keep checking to see if your system is still working.
Hey, if you could get it right every single time you would be the richest man on the planet in no time! The secret is by adopting a strategic approach and sticking to it, you can hopefully get it right more times than you get it wrong and thereby pull ahead.
Your decision must now be ‘how long can you afford to wait?’ With a strategic spread of your stocks, you should not be dependent on any single stock winning for you. Depending upon your chosen timespan, you may decide to wait a while to see if the market maker has a large buy or sell that he is holding back either later in the day or after market close. Your decision will be influenced by your patience, your experience, other opportunities and the pressure upon your finances. Just take care not to over trade.
To predict the future, look to the past and study the graph carefully to see how the price line reacted in similar market conditions in the past. A useful note is to put up the News items on the graph to judge the price line performance. Our graphs are smothered in notes that we have made giving market conditions etc; when we have bought into and sold out of stocks in the past that often prove invaluable in predicting market maker reactions and price movements.
The quick answer? Only time and experience will tell you how to react to this one.
C) WHAT HAPPENS WHEN THE PRICE REVERSES SHARPLY?
If you had to pick one characteristic that is common amongst successful traders in all Markets, Countries, Colours, Creeds, Ages, Shapes and Sizes, it would be discipline.
The only difference between the winners and the losers in the markets is that when a price drops, the winners adhere to their strategy and sell and the losers become paralysed.
Remember that the sole reason for taking a position was to make money, now let us look at the psychology involved when emotion plays a part in the decision making process and run through a only few of the thousands of well worn excuses for holding losing stocks.
“It can’t carry on dropping/rising as steeply as that”. . . . . rabbit in the headlights approach.
“I have decided to wait for the bounce”. . . . ignoring it will NOT make the problem go away.
“This stock owes me too much money”. . . . . resentment is an expensive reaction.
“The market makers have got it in for this stock”. . . . the good old conspiracy theory.
“The market does not recognise the true value of this stock yet”. . . hope doesn’t pay bills.
“I have not actually made a loss until I sell the stock, it will come back”. . Irish school of Logic
“The price is well under the NAV, it has got to bounce back sooner or later”. . . Oh really?
“I bought this stock for my long term portfolio”. . . . . . . . Yeah right!!!!!
The single reason for the majority of people’s losses can be attributed to lack of discipline. Either they have not had the discipline to research their stock thoroughly and outline a strategy before investing, or they have not implemented strategic stoploss lines or locked away profits.
The successful trader utilises a strategic approach that eliminates emotion from the decision making process completely. They deal in cold hard bottom lines and nothing else, they regularly review their performance with a sharp analytical eye dealing only in facts not theories, hopes, intuition or rumour.
They listen to analysts, ‘experts’, journalists, monitor the media and also note opinions on bulletin boards etc: However, their investment decisions will be based on their own opinions formed by their own knowledge of the stock, noting ‘actual volumes’ of trade, accounting for the ‘herd mentality’ of the market and always waiting for the price line to confirm it’s direction before investing. Unlike many ‘emotionally driven’ investors they also take into account the underlying market trades which will not show up on trade analysers etc:
Traders deal only when the balance of probabilities is in their favour and have the discipline to wait until the risk/reward ratio offers the opportunity to achieve a reasonable percentage gain in relative safety. The degree of discipline required NOT to trade when conditions are unfavourable is nearly always underestimated and the inexperienced will find themselves feeling that they ‘have’ to trade because everyone else is and they are missing out.
The other side of the coin is having an unshakeable belief in “your own” individual proven strategy that gives you ability to act with complete conviction the instant that your selected stock meets your criteria. You will note that I have highlighted “your own” because I would ask the reader to bear in mind that they will be dealing with their own money in the final analysis. I cannot stress highly enough the fact that every individual must prove their own strategy which they will adopt to suit their own requirements.
There is also the temptation to ‘chase’ after stocks that you discover that you have missed and are nearing the end of their run. Only study and experience will give the trader enough confidence in his/her own strategy to judge entry and exit points accurately on a given stock.
Only a very small percentage of traders actually beat the market with a degree of consistency that permits them to live off their gains whilst retaining their Capital.
In order to attain membership to this ‘minority’ it is imperative that the trader learns to put in place a tried and tested strategy that will completely eliminate emotion from the decision making process. I strongly suggest that everyone paper trades their strategies first in order to prove consistency before attempting it with real hard earned cash.
It is worth noting that the experienced trader will have their entry and their exit points mapped out prior to buying into a stock. Once they have bought into the stock, generally their first action is to get their sales/purchase order on their screen ready to close their position should the stock move contrary to their predictions.
In order to exclude emotion from exiting an extremely profitable stock, one strategy we use is to sell the stock as soon as your profit level reaches a point which makes us uncomfortable. Because we trade primarily in cfd’s in short term trading, re-entry is not only inexpensive, but it immediately eliminates the ‘worry’ element of substantial profits and if the trend continues as expected, profit will begin to stack up again without the associated stress.
Consistent returns are generally only obtained by leaving the ‘higher risk’ early strikes to the brave and most traders have exited a stock once the rate of advance/decline starts to slow. They also have a strict time frame in which these target percentages have to be achieved and are relatively dispassionate in disposing of lack lustre performers in their portfolio.
If you want to bring emotion into the equation, there is nothing as emotional as seeing your hard earned Capital evaporating at an alarming rate. Remember the experts and analysts, journalists and media commentators still get paid whether they are right or wrong. Where will the ever invisible bulletin board maestro’s be when the bills land on your doorstep with a resounding thud demanding to be settled?
When I can pay my bills with potential, settle my accounts with hope, placate my Bank Manager with promises of ‘upcoming orders’ and feed my family with positive outlooks then and only then can I afford to allow emotion to play a part in the trading equation.
I apologise if this article does not supply the reader with the latest greatest ‘get rich quick’ formula, but hopefully it will help people to preserve their Capital by facing up to the cold hard realities of trading before they lose their money. It should also give the reader some insight into the very profound effect emotion has upon their decision making process.
So finally, is the successful trader a cold calculating unfeeling individual who sits staring blindly into his screens like a computer driven robot? Does he spend countless wasted hours just waiting endlessly for the right conditions to present themselves?
From my experience the vast majority of traders are a fairly easy going amicable bunch of people who whilst demonstrating undoubted abilities, are more than happy to exchange strategies and contrarian views on both individual stocks and markets in general.
There are a small number of people who have finally managed to learn and accept the cold hard fact that there is nothing personal in trading stocks.
They freely acknowledge that they cannot hope to move either an individual stock or the market itself, but do exchange views, strategies and tactics fully and freely to mutual advantage. Where can these people be found? http//www.trade2win.co.uk
Here I have found people with a degree of unselfishness that is unfortunately all too rare in today’s “I am all right Jack” society. The chatroom has regulars who possess a wealth of knowledge on individual stocks, markets and trading strategies and have no hesitation in sharing this with others with a high degree of impartiality and ethics.
Unlike bulletin boards, where petty politics and backbiting all too often prevail with little or no policing of antisocial behaviour, this site is strictly policed to the benefit of all. I have benefited considerably from the generosity of some individuals who have chosen to share their experience and strategies with me and see no reason why anyone else cannot gain the same benefit.
Everyone and I do mean everyone, can benefit from acknowledging the fact that they are still learning from the markets and can do so with a far higher degree of safety by talking with others in the same field.
In conclusion, my first suggestion to all ‘wannabe’ traders is look long and hard at yourself, your personality, discipline and self control before attempting to trade stocks because that is where 90% of your problems will come from.
