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 In almost every speculative market there is a debate
raging. Can traders make money from technical analysis? Can they
make money from fundamental analysis?
The question poses an interesting dilemma:
imagine that you are speculating that Wheat will move up. You are
in possession of all relevant data and you know without a shadow of
a doubt that the Wheat harvest will be less than anticipated by the
market, and as a result of it, demand will outstrip supply.
Therefore you are expecting the markets to move sharply higher.
Unfortunately for you, at the same time a big
farmer who is less optimistic on Wheat is selling his harvest in
the market, for delivery later in the year. He is locking in the
price of his harvest now. Your position moves against you due to
the big farmer selling short Wheat. You don’t know that he is
merely locking in the harvest. Your loss is growing on your
account. Your perception of reality may begin to change as your
loss is growing on your account.
What are you going to do?
Will you ride out the storm at any cost? Will
you throw in the towel and live to fight another day?
You are experiencing the crippling emotion of fear. Your
fundamental view may be correct, but can you stand the pain of
being wrong long enough for your position to turn around in your
favour?
Fear can wreck the best trading plan. Fear can destroy your best
intentions. Not knowing an outcome is something that most people
find difficult to deal with. When a stock falls below your purchase
price, the most common question is when will it stop falling? This
not knowing - but wanting to know - is what causes the classic deer
in the headlight syndrome, where you just freeze up.
Greed on the other hand means wanting more. This is something we
witnessed during the tech boom where people wanted, and expected,
more and more. Of course, after reaching a critical point, we saw
how quickly human emotions changed into fear. Fear of losing what
they owned; which then escalated into panic.
As a trader, you need both of the emotions of fear and greed.
You need to learn to balance them in such a way that they become
useful to you. When you are too greedy you can become reckless and
as a result find yourself overtrading. If you have no fear then you
may find yourself holding on to that loser too long.
When I trade, my plan and strategy is in place. I have to be
patient and disciplined to wait for a specific signal to enter a
trade. Once this occurs I know how much risk I am prepared to take,
even before putting my trade on. This is how I deal with the
unknown part. In other words, I know that I will lose x
amount if my trade goes against me. By knowing this outcome my fear
is removed. If the fear is still there then I reduce my trade size
or take off the trade completely.
At the same time, I have a specific target where I would like to
exit my trade. By using Limit Orders I can exit the trade without
getting caught up in an emotional debate. Yes, this means that
sometimes the stock or index races past your exit point. However,
if you can accept that you will never catch the exact top, then you
will be on your way to stress-free trading.
This is what works for me. As a trader you need to find a style
that works for you. This is something that takes time and
experience. If you have a loss, ask yourself why it happened and
how you dealt with it. There is more to learn from your losses than
from your wins.
Good luck and happy trading
Tom Hougaard
Please remember spread betting is leveraged
and can result in losses quickly exceeding an initial outlay. It’s
not suitable for everyone and you should make sure you fully
understand the risks involved. If you have any doubt, please seek
independent advice.
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