Stock Trading Psychology - Laugh at this Stock Market Cartoon and you'll trade better!

The Stock Market - Monkey Business?

Monkey Business


Once upon a time in a village, a man appeared &

announced to the villagers that he would buy monkeys

for $10 each. The villagers seeing that there were

many monkeys around, went out to the forest, & started

catching them. The man bought thousands at $10 & as

the supply started to diminish, the villagers stopped

their effort. He further announced that he would now

buy at $20.


This renewed the efforts of the villagers

& they started catching monkeys again. Soon the

supply diminished even further & people started going

back to their farms. The offer increased to $25 each &

the supply of monkeys became so little that it was an

effort to even see a monkey, let alone catch it!


The man now announced that he would buy monkeys at

$50! However, since he had to go to the city on some

business, his assistant would now buy on behalf of

him. In the absence of the man, the assistant told the

villagers. "Look at all these monkeys in the big cage

that the man has collected. I will sell them to you at

$35 & when the man returns from the city, you can sell

them to him for $50 each."


The villagers rounded up with all their savings &

bought all the monkeys. Then they never saw the man

nor his assistant, only monkeys, everywhere!


Now you have a better understanding of how the stock

market works.

Happy Trading!

GreenRoomStocks.com

Optimism - Good or Bad For Stock Trading Success?

The subject of this essay is a very interesting one in my opinion – optimism, and how it relates to stock trading success. Optimism is a tricky emotion that can both help and hinder ones’ quest for investment success. It as also an emotion that has been very much in play recently as the market has been taking its frequent and wild swings up and down of late. Optimist has an influence in the trading/investing of almost everyone playing the market (although sometimes despite our best efforts), but is more generally reflective of human nature.

Trading is an incredibly interesting profession, since successful stock trading requires us to confront our emotions, and blend the subjective assessment with the objective data. It further requires an understanding that while our own decisions need to be devoid of emotion, we need to recognize that the market is an emotional beast, and will frequently rotate between excessive greed and fear.

In general, studies have shown that human beings are generally optimistic by nature, since hope has been an essential ingredient of the tenacity of human beings through time, and negative or pessimistic views snatch away the "hope" that people like to cling to. It is not surprising then that negative ratings on stocks are not popular amongst analysts, as they tend not sell, nor are they generally well received by most retail investors. We all like to feel that the future is better and things will improve... and for the most part, we should all be thankful that this has largely proven to be the case over time.

There seems to be a lot of chatter on TV, and in newspapers, that “The bottom is in, and everything is fine again”. But, looking at the facts objectively, are happy days really here again?

It’s certainly true that the market has been rallying since its recent bottom in March. However, the current rally does not tell us the likely outcome of the fate of this rally. Whether or not this intermediate bounce in stocks has been the start of a new leg up, or just a last chance to liquidate long positions and re-establish shorts is the million dollar question, and the answer to this question is critical since it will allow traders and investors to position their portfolios defensively or aggressively, depending on the thesis. Not having a view of the likely resolution of this rally on the upside or downside is like trying to navigate through a forest simply by looking at the next tree... and getting lost in the process.

My stance right now is decidedly bearish, since the majority of evidence suggests that the recent market up thrust has been nothing more than a bear market rally. The advance-decline line is lagging in this current rally, and the volume patterns have not been constructive, to name just a couple of key technical concerns. It seems that most of the rally is due to a withdrawal of supply, rather than enthusiastic new demand. Most rallies seem to be met with heavy selling/profit taking, as if investors are passing on the revolver in a game of financial Russian roulette.

On the fundamental side, we have to question if the biggest credit crisis coupled with a real estate crisis of historic proportions, with record food and oil prices, a weak and getting weaker dollar, and massive US deficits coming together to impact an over leveraged economy, will simply pass by with one of the shallowest bear markets ever? While anything is possible, it certainly seems unlikely.

Therefore, my basic strategy has been to treat the rally as one which will eventually fail, and keep a balanced portfolio of smaller long positions in strong sectors and increased short positions in weak sectors, while constantly raising stops to lock in profits to both sides, as I feel that we are currently in a struggle where we will see a fair amount of chop in the near future. That said, I understand that the market tells me what it wants me to do, and not vice versa. As traders and investors we all need to come to grips with the reality that in the stock market we are all dealing with probabilities, not certainties.

Which gets me back to the point – optimism. The optimistic stock trader (and 99% of the analysts and talking heads on TV) will say that the bottom has been put in, jump back in, “happy days are here again”. But are they setting themselves up for a fall? There cannot be a trap without bait, and there is no better bait than the promise of easy money.

So keeping in mind that the market, and market makers, are incredibly adept at wreaking havoc on our emotions, namely fear and greed, I feel that hope is one of the most dangerous things that any trader has to deal with, if that hope is not accompanied by an extreme understanding of the reality of the situation at hand. Yes the promise of a better day makes us feel a little better about what we are doing, but at the same time we have to not only live in reality, but try our best to profit from it. As the old saying goes, “prepare for the worst, hope for the best.” Words to live by in my ever so humble opinion.

Of course, this also means that we always stay humble and reserve the right to change our mind when the evidence shifts to the contrary. Without this humility and flexibility, trading in the market is like driving a car at 100 mph without brakes. We need to critically assess our own thesis repeatedly to ensure we are not in love with our own thinking, but that it can stand up to critical scrutiny. Like an elephant walking on the beach, a market typically leaves enough "footprints" for us to follow before it takes off to new heights, and if we can get adept at following these, we can improve our portfolio returns over time.

Given the choice between feeling relaxed about positive predictions about the market versus improving financial returns through an objective (albeit sometimes, and currently negative) view of the market, I would choose the latter every time.