A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Hope May Spring Eternal, but It Won't Make You Money
06/29/2015 6:00 am EST
Besides fear and greed, there is another emotion that can cause a trader to break the rules of his own trading plan and possibly hold onto a losing trade for too long, and as Frank Kollar of Fibtimer.com points out, that emotion is hope.
As described in Reminiscences of a Stock Operator by Edwin Lefevre, "The speculator's deadly enemies are: Ignorance, Greed, Fear, and Hope."
Each of us has a desire for success. It is why we here at Fibtimer.com use market timing to guide us to profitability. Market timing not only increases our gains in bull markets, but also protects our capital against loss in bear markets.
But if you are not careful, that same desire for success can stand in the way of your ability to recognize reality, even if it is right before your eyes.
Hoping for Success
All of us have a survival instinct that typically causes us to focus on good news. Bad news is avoided or at least put on the back burner.
When we take a position in the market, whether bullish or bearish, we hope it will be successful. Hope can be such a powerful emotion, that when the same trading plan that told us to enter a position originally, reverses, and tells us to exit immediately, our emotions may very well focus on the possibility that if we just hold on a bit longer, any loss might be erased.
Just give it another day. Just wait till it is back to break even.
The only way to avoid this is to recognize that hope can destroy our ability to profitably trade the markets.
Successful Market Timers Win Because...
Market timing, in fact all trading, cannot be successful without a plan. Trading by emotion, by news events, or out of fear, is not very different than gambling. Successful market timers win because they follow a plan.
We all know that no person (trader or market timer) will be right all the time. Knowing this, we must accept that we will have losses.
"...recognize that hope can destroy our ability to profitably trade the markets."
What separates the winning traders, from the losing traders, is their ability to recognize that when a trade turns bad, there is no emotion that can fix it. The only correct decision is not really a decision at all. If you are following a good trading strategy, just follow the plan. If the plan says reverse, then follow it. If the plan says to go to cash, then go to cash.
Simple? Not if you cannot accept a loss. Then hope springs eternal. You can find a hundred reasons not to execute a trade. Anything to delay so that hope can work miracles.
Winning market timers have their share of losses. But they keep the amount of those losses small. They follow their plan and never hold onto a losing position hoping it will break even or turn into a winner.
In Vegas the House Always Wins
When we go to Las Vegas, we know that the odds are stacked in favor of the house. But we gamble anyway in hope that we will leave a winner.
But market timing is not gambling. When you trade with a plan you have an edge that you know will win over time, as long as you use discipline and follow it. Just as the house knows it will win over time in Las Vegas, the trading plan provides the edge that makes us winners.
But once we lose that edge-and start hoping instead of following our plan-we become like the gambler in Vegas.
And in Vegas, the house always wins.
Hope and Your Ego
Hope is also closely tied to ego. We do not want to admit that we have made a mistake. Our ego wants success and wants it immediately.
Losses do not feel very successful. Our ego can cost us a great deal of money.
In order to make money, we need to keep losses small, while letting our winning positions run. Neither hope nor ego has any place in market timing or in any form of trading.
When you trade with a plan, it is in black and white. You know when to execute a buy or sell signal because the plan tells you when. A plan does not rely on hope. A plan has no ego. A plan gives us, as market timers, an edge over the market and other traders.
Each day we should examine ourselves. If we feel that hope is part of our trading plan, remember that hope is almost a guarantee of losses.
The only way we keep our edge over the stock market is when we follow the plan.
By Frank Kollar, Editor, Fibtimer.com
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