Greetings, fellow Pro-fundity team members -
2-16-01 Page

This Week's Guidepost

What, me worry?

Recently, a question was asked about moving in and out of positions and the stress created. Let’s digress this week and look at a recent pick and the questions (concerns) that might help or hinder our ability to make money. On 1/19/01, four weeks ago, the ticker SBIB was offered as a breakout candidate. The chart of this stocks progression since that time is herein discussed along with some critical emotions we all deal with.

1. In any field of endeavor we have to first identify our enemies, those difficulties or barriers that must be overcome to find victory. For traders, our most preeminent foe is emotion! Learning to overcome our emotions while trading may be the greatest challenge we will face. That means when we arrive at the point when we trade from our head, not our heart, we will win much more consistently.

2. Let’s examine the following chart on SBIB, pictured as it was on the date of the pick, 1/19/01.

   

3. If we had taken a position on that day, at $18.75, our expectations were to make money. That is, we bought the shares because we expected the price to go up. But go up how far? We’ve said we should have a plan for an exit on both sides of the fence, a stop-loss if it goes down and some expected exit point on the up-side. We know that all choices, as short-term traders, will eventually come back down. We use technical analysis to help us recognize the correct exits, but we should still have some idea about what we hope to gain at the time of purchase. The next table lists what the price would have to get to for different returns (possibles). Also listed are the closing price each day since that pick with actual returns.

   

4. Okay, now put yourself under the gun as a trader and decide when to sell. The next chart shows SBIB on 2/2/01, at $19.94. This is a 6% gain in only 10 days. Would you sell? The monster emotion for traders is FEAR! But what kind of fear? Consider this question: Are you more afraid of losing the ranch, or missing the next train? If your concerns are the first, it would be easier to sell. However, if you are afraid this stock is shooting further up, it’s tough for you to sell here. (This type fear is labeled Greed, but its root is the same difficulty, emotion). Fear of losing the ranch (money) can cause us to exit good trades too early, and stay in bad ones too long. Fear of losing often urges us to ignore information that’s telling us what the real situation is, not how we want it to be!

   

5. Click ahead to 2/6/01 where we see a great increase to $21.00. We’re now up 12%, where will this stop??? Whose ready to sell now with the train moving out of the station at a rapid clip?

   

6. Moving ahead, we see a $1.00 drop on the following Monday, we can’t sell now because we’ve lost some profit. Need to wait for it to come back. (Where are our fears now?) The “need to be right” is a close companion of fear. We grow up learning its important to always be right. You know, successful people are “right” and those who fail are “wrong.” However, the need to be right in trading causes enormous losses. When a position is opened, then falls quickly to our protective sell-stop, our need to be right will whisper, “don’t sell at a loss, all the indicators are up, this will come back and be a terrific trade and you’ll be right.” Fact is it may come back, but in a week, a month, a year? Think of the profitable trades missed by holding that part or our equity in limbo.

   

7. But the stock didn’t hear our “hope,” it just continued down to its close last Friday at $18.56. That leaves us $1.32 in the hole disregarding any commission cost. Now we are too far in to sell, we’d better wait til it comes back! And so it goes. Trading can be filled with struggles like this, an emotional whip-saw. We’ve only looked at a few of the messages fear and greed send us. Other emotions that cause havoc in the market are faith and hope. Faith sends the message, “its okay to stay in this trade because the market always moves up. By tomorrow everything will be fine.” Hope whispers, “Please, please stop this stock from falling, please get me out of this trade before I lose all I have, please!” Any trades based on faith and hope mean we are not controlling our trade. Rather, our trade’s controlling us.

8. Next week we will reexamine this trading scenario on SBIB and let technical analysis come to our rescue. Stay tuned.

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