The PSEi closed down 13 points today to settle at 2,437.99. On a week on week basis we are up 68 points from last Friday's close of 2,369. At this point, the much hyped 4000 index level has converted many traders into forced investors. I wrote a five-part mini series before on the distinction between the two (i.e. trader vs investor). You may check the following links for each part.
Are you a stockholder or a stocktrader - Part I
Are you a stockholder or a stocktrader - Part II
Are you a stockholder or a stocktrader - Part III
Are you a stockholder or a stocktrader - Part IV
Are you a stockholder or a stocktrader - Part V
I have my own views on which one you should be. It's based on your personality, risk tolerance, available time and aptitude. The most important question is : Can you cut your losses when the going gets tough?
If you answered yes, then it's good. But that's just the first step. You also have to answer the following questions -
Can you be unemotionally attached to the stocks that you will buy?
Will you promise to follow your established cut loss point?
Will you promise to follow your trading system?
Will you also promise to be patient when in a bear market?
There are other questions in mind and it will always redound to three letters - Y-O-U.
As the poem goes, I am the master of my fate, I am the captain of my soul.
So if something goes wrong, it's not the stock market. It's not the other traders or investors out there. It's not your broker or the other brokers. It's not the speculators. It's you. When you put your money into a stock you think will go up, what are the reasons?
Oh, let me count the ways -
Speculation
Hot tip from (a) friend, (b) online forum, (c) broker, (d) relative, (e) a divine message
"Everybody's buying it, so why shouldn't I" syndrome
Business expansion
Business outperformance
Bullish pattern or formation seen in the stock chart
Whatever your reason for buying your stock, if that reason is gone, then why are you holding on to it? That's one simple question that even I tend to forget. That is why in the days spent that I was thinking about the market, I came up with a novel but unique perspective to cutting losses.
Last week, I ended with this note -
Although you don't have control over what is going on, what you have control over is ____. This is the power directors have.
What you have control over is what you see in the market - whether good or bad. What are the two verbs directors the world over scream when making a movie? One is ACTION. The other? Yes, you guessed right folks, CUT!
My friend, when you are a stock trader, you view the action on a boring screen that includes the ticker, the index performance, the volume review, and the stock quotes. This is the movie you are watching and it's in front of you whether it be a computer screen, a TV, or the trading floor. Since you are the director, if you don't like what you're seeing, i.e. your stocks' performance, what do you scream? CUT? And that! That is what you should do.
It's just three letters, but the sheer willpower to do that is formulated as follows -
CUT + Muslces + Guts - Emotions = CUT LOSS SUCCESS!
It will be difficult to do in the beginning. If you're already six months to one year into trading, and you still haven't done a single cut loss, I think you have to visit the nearest mirror and ask yourself if you are really a trader, or an investor.
If your personality is that of an investor but you still do trading, then you'll be burning your money faster than you can curse.
If your personality is that of a trader but you are investing, then you won't be maximizing your gains.
The most important thing is to determine what you want from the stock market and what you are if you are putting money into it. And if all signs show that you are a trader - and you can become a successful one at that - always remember, you're the director of the movie that plays out every trading day. At 9:30AM in the morning, it's ACTION. And in between that up to 1200PM, if you dont like what you see, say CUT!
**************************************
During the previous CAF, i made a gaffe. I said stay away from Meralco. My basis for that decision was due to the issues facing the company. I hope people were still able to make money when they thought beyond the issues and looked at the chart instead.
At least those who asked me about ATN aren't going to curse me this week. Hehe =p
I'm human, and so I do make errors in judgement.
Good luck to us next week!
P.S. This is weird. Today is Friday but my blog entry is published as a July 10 / Thursday entry. See you next week!
Showing posts with label Guerilla Investing on Trading Psychology. Show all posts
Showing posts with label Guerilla Investing on Trading Psychology. Show all posts
Thursday, July 10, 2008
Friday, July 4, 2008
The Movie You've All Been (Still) Waiting For
If the performance of the Philippine Stock Exchange Index was a movie, I envision its short description to be -
Movie Title - "PSEi at 4000"
Director - D. Bears
Scheduled Release Date - December 2007
Status - Postponed Indefinitely
Genre - Action. Drama. Suspense. Horror.
******
That introduction is a perfect segue to what I want to discuss today. I want to share with you an important component of stock trading psychology and discipline that many people know but few people practice. It's called cutting losses.
As I've learned from Absolute Traders, that's what separates the men from the boys. And folks, there are only a few good men (traders).
It's a sight we often see and a story we often hear. After buying a stock, a novice trader builds an appendage linking himself to his stock. He begins to fall in love with it and before he knows it, the stock becomes a certificate waiting to be passed on as an heirloom.
That's the sad reality. And as in life, the best lessons are learned when you face defeat.
In a bull market, a regular stock trader thinks he is a genius because he is making money. What he doesn't know is that the it doesn't take a genius to make it big in a bull market. Everything is going up. Even speculative stocks.
Then when the bear comes knocking on the door, the trader gets caught with his pants down.
This is what happened to a majority of stock market traders who came in 2007. If you thought stock prices were cheap during the 2nd quarter, they're even "cheaper" now. So now people are waiting for the market turn. And they are doing that...still waiting.
Admitting Defeat: Freeing yourself from emotions
It's difficult when you have to admit defeat. After making money in a bull market, you think you can't fail. If you are a technical analyst - regardless of your expertise - 99% of the time the failure is not because the market didn't go your way. It's you.
Human emotions are as fragile as the stock prices today. That's why it's so difficult to become a very successful trader. It's not that easy to be free from emotions.
My broker has plenty of clients. He has two phones. Sometimes he'd ask me to wait on the phone while he answers his other call. I'd hear him calming the nerves of his client. It just gives you an idea as to how dynamic human emotions are.
I can still remember what Bonner Dytoc (or was it Danny Go?) said. Investors are traders who forgot to cut their losses. There are real long term investors out there, but in the Philippine market, it's quite difficult to be an investor. It requires a supreme test of patience.
Ask someone who bought certain stocks in 1997 and in 2001. I am sure this person will give you his two cents worth. Or he can just give you a stock that's worth as much. :-D
The key thing in keeping your emotions in check is to know when the chart has broke down. If you don't mitigate your losses the next to break down will be you. Apart from that, you need experience. If you've been actively trading for a good three months, I am very sure that in that span of time you will have learned the value of cutting your losses.
Obviously though, there are still many stubborn people out there. Apart from being stubborn, people like to be sentimental and being needlessly optimistic even if the signs point otherwise. As someone once said, there's no sense in holding on to a stock if you're only investing (or trading) purely on hope.
Just remember, what is the main reason you bought the stock? If that reason is not there anymore, and the chart is obviously confirming that also, then it's time to bid your stock adieu.
You as Director
I am always thinking of how to make technical analysis, trading and investing more relevant for people who have little to no knowledge about the stock market. I made a lot of errors in my short trading life, and I don't want people to have to go through the same. If you lose some, you should win some, otherwise, it's easy to feel disheartened and just classify stock market investing as pure gambling.
As I pondered on the aspect of cutting losses, it dawned upon me that as a stock trader you are actually watching a movie. The stock market is a movie composed of actors called the bear, the bull and the utterly clueless. Although you don't have control over what is going on, what you have control over is ____. This is the power directors have.
And this tip I am sharing with you is absolutely free! But not today. I'll share what it is in the next entry. Stay tuned next Friday! For new readers, I only update my blog on Fridays because of my busier schedules now.
Movie Title - "PSEi at 4000"
Director - D. Bears
Scheduled Release Date - December 2007
Status - Postponed Indefinitely
Genre - Action. Drama. Suspense. Horror.
******
That introduction is a perfect segue to what I want to discuss today. I want to share with you an important component of stock trading psychology and discipline that many people know but few people practice. It's called cutting losses.
As I've learned from Absolute Traders, that's what separates the men from the boys. And folks, there are only a few good men (traders).
It's a sight we often see and a story we often hear. After buying a stock, a novice trader builds an appendage linking himself to his stock. He begins to fall in love with it and before he knows it, the stock becomes a certificate waiting to be passed on as an heirloom.
That's the sad reality. And as in life, the best lessons are learned when you face defeat.
In a bull market, a regular stock trader thinks he is a genius because he is making money. What he doesn't know is that the it doesn't take a genius to make it big in a bull market. Everything is going up. Even speculative stocks.
Then when the bear comes knocking on the door, the trader gets caught with his pants down.
This is what happened to a majority of stock market traders who came in 2007. If you thought stock prices were cheap during the 2nd quarter, they're even "cheaper" now. So now people are waiting for the market turn. And they are doing that...still waiting.
Admitting Defeat: Freeing yourself from emotions
It's difficult when you have to admit defeat. After making money in a bull market, you think you can't fail. If you are a technical analyst - regardless of your expertise - 99% of the time the failure is not because the market didn't go your way. It's you.
Human emotions are as fragile as the stock prices today. That's why it's so difficult to become a very successful trader. It's not that easy to be free from emotions.
My broker has plenty of clients. He has two phones. Sometimes he'd ask me to wait on the phone while he answers his other call. I'd hear him calming the nerves of his client. It just gives you an idea as to how dynamic human emotions are.
I can still remember what Bonner Dytoc (or was it Danny Go?) said. Investors are traders who forgot to cut their losses. There are real long term investors out there, but in the Philippine market, it's quite difficult to be an investor. It requires a supreme test of patience.
Ask someone who bought certain stocks in 1997 and in 2001. I am sure this person will give you his two cents worth. Or he can just give you a stock that's worth as much. :-D
The key thing in keeping your emotions in check is to know when the chart has broke down. If you don't mitigate your losses the next to break down will be you. Apart from that, you need experience. If you've been actively trading for a good three months, I am very sure that in that span of time you will have learned the value of cutting your losses.
Obviously though, there are still many stubborn people out there. Apart from being stubborn, people like to be sentimental and being needlessly optimistic even if the signs point otherwise. As someone once said, there's no sense in holding on to a stock if you're only investing (or trading) purely on hope.
Just remember, what is the main reason you bought the stock? If that reason is not there anymore, and the chart is obviously confirming that also, then it's time to bid your stock adieu.
You as Director
I am always thinking of how to make technical analysis, trading and investing more relevant for people who have little to no knowledge about the stock market. I made a lot of errors in my short trading life, and I don't want people to have to go through the same. If you lose some, you should win some, otherwise, it's easy to feel disheartened and just classify stock market investing as pure gambling.
As I pondered on the aspect of cutting losses, it dawned upon me that as a stock trader you are actually watching a movie. The stock market is a movie composed of actors called the bear, the bull and the utterly clueless. Although you don't have control over what is going on, what you have control over is ____. This is the power directors have.
And this tip I am sharing with you is absolutely free! But not today. I'll share what it is in the next entry. Stay tuned next Friday! For new readers, I only update my blog on Fridays because of my busier schedules now.
Subscribe to:
Posts (Atom)