If you have been trading for some time now, you may have noticed that it takes more than just research and analysis to win consistently in the market. You may have attended all the seminars, read all the books, and subscribed to all the market gurus but your trade performance may still remain at the mediocre level. This just shows that knowing is only half the battle in the stock market. If you want sustainable success, then the next step is to execute the trade plan well.
Trade Execution is a matter of objectivity. As a trader, you set up a trade plan that consists of rules, signals and risk precautions to be able to handle a variety of scenarios that may arise in the market. When the planning is taking care of, the most critical part is to be able to execute the plan. However, it is during execution where most traders experience emotional stress.
In this post we'll outline some tips on how you'll be able to clear the fog of emotion in trading and become a process driven trader.
The Emotional Dilemma
A big part of winning in the stock market has to do with managing the Emotional Noise within you. This is why you always hear the phrase "Trade like a Robot" get used in occasion. This means that traders have to separate their decision making from their emotions when executing their trades.
As humans, we naturally lean towards a certain emotion for any type of situation. We get excited, fearful, happy, angry or sad. That's normal. However, in the stock market, our emotions tend to obscure the objective decision making needed in stock trading.
If you look closely, the major elements of a trade plan is straight forward and simple. You filter your stock picks based on your technical criteria and buy it once your "buy signal" is triggered. After which, you let the stock make its move. You sell at a profit when it hits your sell signal or you cut your losses quick if the setup fails. The concept is simple.
The problem lies in the execution.
Let's paint a common scenario that happens when you let your emotions dictate your trade decisions:
You're monitoring a specific stock that aligns well with your trade plan. Your goal was to buy it at the bounce off from support and sell it near its key resistance level. A simple straight forward swing trade.
While executing the trade, a surge of emotions hits you. You feel anxious and scared when the stock finally hits support level. A lingering sense of doubt creeps in telling you that it may still go down lower. You give in to the anxiety and you hesitate to buy. Then the stock bounces from support and recovers considerably. You missed the bounce! You feel a deep sense of regret. You tell yourself to wait for it to go down to support again and only then will you buy it.
The stock price rallies considerably and hits key resistance levels. You beat yourself up because you did not buy it when your trade plan told you too. The stock looks to be heading for a breakout and you buy it at the top. You feel excited. At last you finally bought it. Then the stock encounters heavy profit taking and goes down considerably. You then panic and pray to the heavens above for some sort of miracle.
This is the classic trade experience of an emotional trader. Obviously no one wants to endure this. So, if you have decided that you want to take stock trading seriously, you must transition into becoming a process oriented trader.
Becoming a Process Oriented Trader
Once you place your money in the market, it will only remain yours as long as you manage it well. "Manage", being the operative word in this context, means that you have to constantly follow your trade plan with utmost discipline.
When you handle the process well, the profits will naturally follow.
Here are some tips that can help you:
1. Enjoy the journey as much as the destination
To "trust the process" is a cliché used so often, but it is what defines the entire journey of stock trading. To trust the process in stock trading means that you understand that nothing can be rushed. You will not turn a 5 digit portfolio to million pesos overnight! You have to be in love with the process of trading itself. The daily chart analysis. The interpretation of institutional buying and selling. The comprehensive research of news and fundamental data. The journaling. The constant monitoring of technical signals. All of these must be within your key interests. If you do not like the process involved in trading, then put your money elsewhere.
2. Discipline. Discipline. Discipline.
You cannot run away from the emotions you feel at any point in time. You can only manage it. To manage it in the context of trading means that you simply follow the trade plan regardless of how you may feel.
If the trade plan tells you to buy as long as the support level holds and cut when it breaks down from a specific level, then just stick to the plan and do it. You may feel anxious or scared, but you have to shrug off the feeling and simply stick to the plan.
If the trade plan tells you to sell near a key resistance, go ahead and sell when it hits that price level. If it breaks out further, that is no longer your concern. You followed the plan and you sold at profit. Another play will surely show up again for you.
If the trade plan tells you to cut your loss once a key support level breaks down, cut your losses quick. It is better to take a small loss than to be trapped in a losing stock for an indefinite amount of time. If it whipsaws you and reverses back up, charge it to experience and move on.
It all boils down to discipline. Know the trade plan and execute the trade plan. This will require some experience to master but once you do, you will see a considerable improvement in your trade performance.
3. Have clear expectations
You cannot expect to harvest oranges when you plant apple seeds. The same line of reasoning is true for when you execute your trade plan. When your trade plan is crafted on a long term position trading strategy, it is obvious that you'll have to wait longer before you can sell it at your intended price level.
If you're trade plan is based on an active swing trading strategy, expect that you will only be able to execute it when you can monitor the market constantly. Expect more volatile price action the shorter the timeframe is. And expect unpredictable swings when trading speculative stocks.
If you're expectations are clear, you can expect less emotional stress. Clarity is the boon of all traders. By constantly being process oriented, you will develop the habit of becoming objective. You may feel excited, angry, tired, frustrated, or sad but you will be able to shrug it all off and simply stick to the plan. You execute the plan and you live with the results. That is the hallmark of great traders.
4. Focus within your realm of control
You can only manage that which you have control over. This means, focusing on stuff outside your realm of control will only need to emotional stress. If it is outside of your control, let have fate have its way with it and just focus on the variables you can measure and manage.
Stock Trading Variables YOU HAVE CONTROL Over:
Stock Selection (The stocks you choose to monitor and trade)
Stock Price Entry (The stock price wherein you buy)
Stock Price Exit (The stock price wherein you sell)
In A Nutshell
Remember that mediocre effort leads to mediocre results. If you want to overcome the fog of emotion, you must actively seek to become process driven in the way you approach the market. Becoming objective is a matter of discipline and focus. If your trade plan is well crafted, trust it and execute with precision.
Here is some sound advice from Dan Sullivan:
"The difference between successful investors and unsuccessful investors is how they react to being invested in a losing stock. There is absolutely no reason to allow a mistake to become an ego shattering experience. Being wrong is not the problem. Making a mistake is not the problem. The problem is being unwilling to accept the mistake. The problem is staying wrong."
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