by Dave Landry
Recently, I was leafing through the Layman's Guide To Trading Stocks for a pattern recognition project (see this webinar for a sneak peak). There's a lot of good stuff in there if I say so myself. Anyway, I found the following "emotional checklist" for trading. In my classic "Random Thoughts" style, I decided to expand upon it.
We are all prone to make emotional mistakes. Check the following before making your next trade. Do this until it becomes second nature. The next time you find yourself in a slump, re-read this and return to the basics.
For trend following, this means that the market has been trending and not trading sideways. Draw your arrows and apply the Rip Van Winkle “sleep test.”
Random Thoughts (RT): This simply means to imagine that you went to sleep for a long time. When you awoke, you checked the market prices and noticed that they were relatively unchanged. This is the reoccurring "net net" issue that I often discuss. Many people claim to be trend followers, but they are often interested in stocks that have gone absolutely nowhere for weeks and even months. Come to the next Week In Charts and you'll observe this first hand.
Remember, money management will cure a multitude of sins. It will keep you in the game until the sun shines on you and your methodology.
RT: There's a saying in the South: "the sun doesn't shine on the same dog's ass every day." As I've said ad nauseam, I was once criticized for saying that momentum trading can be "streaky." Well, it is. You print money for a while then you all-to-quickly go right back to grinding it out. Money management cures a multitude of sins by keeping your ego in check when the sun's shining and mitigating the damage when it isn't.
If you have only experienced a bull market, then trust me, you do not know what it is like to be in a bear market. We are all human, it is impossible not to get excited when things are going well and depressed when things are not. Knowing that market conditions change can help temper these emotions.
RT: Well said Big Dave!
Knowing that your methodology has the potential to stop you out numerous times before catching the mother-of-all trends makes it a lot easier to handle losses when they occur.
RT: As I mention often, I've had many clients over the years come in at the perfect time. They print money and quickly think they get it. This trading thing is "SO easy." The Humphrey Neill quote "Don't confuse brains with a bull market comes to mind," but I've also seen people do amazing things in one-sided bear markets.
Ego driven behavior begins to rear its ugly head. They soon fire me because they "get it, and want to do it all on their own." I'm not saying that I'm all that and a bag of crisps nor, am I implying that I'm the Grand Poombah. I've had my ass handed to me way more than I'm willing to admit. I'm just saying that I've been around the block a time or two and know that there will be good times and bad.
Conditions change and the monetary and emotional fall often comes shortly thereafter. My favorite clients are those who have stuck it out through the good, bad, and indifferent times. They know that bad times often follow good. They keep me "on staff" to keep them on even keel-helping them to press (a little) in good times while keeping their egos in check and mostly sit on their hands in bad (i.e. to be patient). I also like clients who return after going off to chase empty promises and Holy Grails. They realize that there is no magical bullet-other than grinding it out in a "trading simplified" manner.
If you are trading my swing-to-intermediate method, then you should not be making numerous trades daily. You should not be buying markets because they are oversold or shorting them because they are overbought.
RT: I've "fixed" a few clients by dissecting their portfolio-removing their day trades, breakouts (other than in IPOs), reversal trades, and any other trades outside of the core methodology. Once these are removed, their portfolio is often profitable. The "ah ha" epiphany that follows is usually more of an "I know, I know!" (keep reading)
The main secret to trading is that there is no secret. If there were, someone would have found it and there would be no more markets. There are "Trading Simplified" simple secrets such as doing just one thing. And, when the sun isn't shining, you sit on your hands. You might want to write that down.
I once met a trader who claimed to be trading breakouts when the market was following through on breakouts and a reversals when it wasn't. No one is that good. I can all but guarantee that you'll be perpetually out of phase if you try.
Are you trying to get in early-i.e. before a trigger early and exiting at the
first minor signs of adversity? In other words, are you not following your plan?
RT: Well said Big Dave!
RT: It's cliche' to say plan your trade and trade your plan, but do you do it? The reason that many don't plan a trade is because the moment you plan is the exact moment that you have to accept the fact that you could be wrong. And, once in a trade, if you do follow the plan it means that you will accept what the market gives-or takes. It removes hope--and as humans, we're not wired to be hopeless-otherwise, why bother?
RT: Re-reading this one hits home. My father was recently diagnosed with Leukemia and it took his life within a few short weeks. On nearly the same day, my mother was diagnosed with Lymphoma. I'm now spending my time split between two offices, helping her in her battle three hours away, while trying to keep it all together at home-which includes downsizing from six+ acres with a guest house to something much smaller, maybe even a condo.
All of this is forcing me to look long and hard at each and every trade. Am I taking this trade to try to "fix" something in my personal life?, or is this a fantastic opportunity that must be taken? You know, even if things are going fairly well in your life, you might still want to ask yourself that question.
RT: I've made videos and have written extensively about this, both here at DaveLandry.com and in print. Provided that you've traded through a variety of conditions and know your methodology, then you know which of the above nine you're violating. If not, ask me and I bet that I can get you to say "I know, I know!"
We're emotional beings, prone to make emotional mistakes. Embrace and accept this. Then, check this checklist before making your next trade.
May the trend be with you!
P.S. Are you making any of the aforementioned emotional mistakes? Do you have any to add? Leave a comment below and let's discuss it!
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Dave Landry has been actively trading the markets since the early 90s. He is managing member of Sentive Trading, LLC (est 1995) and author of 3 books of trading including The Layman’s Guide to Trading Stocks. He has made several television appearances, written articles for numerous magazines, He has spoken at trading conferences throughout the world (including Russia, Hong Kong, Australia, Germany, Italy, and others). He has been publishing daily web based commentary on technical trading since 1997. He has a B.S. in Computer Science and an MBA. He was registered Commodity Trading Advisor (CTA) from 1995 to 2009. He is a board member of the American Association of Professional Technical Analysts. Dave can be reached at www.davelandry.com
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