Two Emotions Besides Fear and Greed

03/18/2014 10:06 am EST

Focus: STRATEGIES

Deron Wagner

Founder and Head Portfolio Manager, Morpheus Trading Group

Deron Wagner discusses the two other emotions besides fear and greed to be mindful of when trading; hope and regret.

ROB:  Traders have to deal with two primary emotions of fear and greed, but I'm here with Deron Wagner, and you've mentioned two other emotions that we don’t often talk enough about. 

DERON:  Yes, Rob.  The other two emotions that a lot of traders overlook are actually hope and regret.  Hope actually comes in to play when a stock is a reverse the wrong direction; it's going past your stop, and you weren’t disciplined, you didn’t honor your stop, and then you hope that it's going to bounce back.  Then you say, "Well, let me just wait, and I'll hope that it's going to come just maybe close to break-even," and the stock slides further; "Well, I hope it's going to just come back, you know, even close to break-even," and meanwhile it's a very dangerous cycle where a stock keeps going lower and lower.  Hope is an emotion that can kill a trader, because if they place hope in the stock coming back rather than just honoring their stop, it's very dangerous. 

Regret is another emotion that, actually, I'd say, is very timely in bull markets in general.  We talked earlier about runaway bull markets, and whenever a trader gets involved in a runaway bull market, a very common thing that happens is they miss the move or they feel like they've missed the move, and then there's the regret.  What happens is, rather than actually waiting for stocks to take a break or correct a little bit, traders will chase the bid or chase the price, so to speak, and buy at any price just so that they don’t have the regret of missing the move, and then often that leads to a counterproductive situation as well. 

ROB:  What would you say to a trader who has experienced that regret—not saying that I just did it, but what would you say to a trader who's experienced that?  They bought—they chased the trade, they got in, it's going against them now; what do they do? 

DERON:  Well, the first thing to do is make sure to always have a predetermined stop-loss in place so that you don’t fall into the hope mode that we just spoke about.  It's okay to chase a little bit if the stock immediately goes your way.  In a strong bull market, often you can chase and the stocks will still keep going up, but if you find that your timing is off, I think the best thing is just to get quickly out, keep that stock on your watch list, and then wait for a period of consolidation, maybe two to five weeks of sideways tightening price action on lighter volume, and then look to catch the next move up, because stocks move in waves; they don't go in a straight line.  There's no need to worry or fear or regret missing a move. 

ROB:  Well, when you're watching out for those emotions, it's a lot easier to deal with them when they appear. 

DERON:  Yes. 

ROB:  Thanks, Deron. 

DERON:  Thank you.   

ROB:  You're watching the Money Show video network. 

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