I’ve told you how I often go for runs.
I learn a lot about myself when I run. Sometimes the runs feel great, other times, I am just slogging along, in a bit of pain, struggling to go a distance that I just breezed through a few days earlier.
But no matter how “bad” I feel after a run, I feel good. I might have been uncomfortable, my lungs might have been burning. My legs sore. My feet hurting.
But believe it or not, I actually like it.
I always feel better after a run than before, no matter how bad it was!
Sometimes, doing something that’s hard or uncomfortable is good!
The same with trading.
Often times doing the right thing can feel like the wrong thing.
I was uncomfortable entering my more recent trades. Let’s look at them…
I buy stocks that are likely to have reversals. I don’t just blindly step in front of a stock that is knifing downwards, I am looking for a sign that the stock might be ready to trend back upwards, with signs that a reversal is likely, whether it’s an up day or positive reversal candlestick pattern that occurs near an area that looks to me like a logical support area.
However, even with those signs that it might be a good area to buy, at the time…it did not feel good to be entering these trades.
Take a look at these charts:
Pretty freaking scary to step into some of these right?
Those are some nasty declines.
With all of these patterns the stock had a nice sharp jump upwards, then they just bled out, moving painfully lower each day. The sentiment of everyone involved with these stocks at the time I entered on the last candlestick was likely pretty darn negative.
Related to this, Stocktwits can be fun to check out to get a feel for what people are thinking.
If you were to check out the Stocktwits.com boards for each of these at the time of my entry, the negative sentiment was rampant. You could smell the fear from those that bought in on the big pump upwards, many of them buying near the top of that big candle, looking for easy money. Many of them probably held on, hoping each day that it would somehow turn around.
Also, you could almost feel the glee and confidence of the bears as they celebrated the decline, patting themselves on the back, and rubbing it in to the bulls who had bought.
At this point, the bulls who bought on the way up or near the top, hoping for huge gains, have lost all hope, many are throwing in the towel and selling at a huge loss in disgust. The company sucks, the good news wasn’t so good after all, etc…it’s all there, blathered across Stocktwits.
Pretty much, the majority opinion was that you would have to be a complete sucker to be buying.
But for each of these stocks, they had reached what I thought to be a pivot point. On these charts above, on the last day, there was a slight uptick.
A small up day, at what looks like a good entry point.
That’s when I enter.
However, though we had this recent up day, it really doesn’t feel so great to enter.
Who is to say that this lone glimmer of light is really just going to be snuffed out and the nasty downtrend resumes?
It certainly feels that way.
Though it’s uncomfortable, maybe the right thing to do is buy.
Ok, so for these 3, look at what happened next:
Nice turn-around’s right?
It looks as clear as day now that those were logical areas of support, and the signs were there, but at the time, it didn’t feel so good (read my post about the “hard right edge” about how everything looks so easy in hindsight).
But we don’t get to go back in time and place trades in the past.
We have to deal in the present.
The uncomfortable present, when it doesn’t feel so good to be placing a trade.
You know what also felt uncomfortable about these trades?
Selling.
I took profits on these trades and sold when the emotional tides had switched to the positive.
Now things had rocketed back upwards, everyone was feeling good. If you were to check out the Stocktwits feeds for those shares at this point, after the rebound, the dour mood from the decline had switched to elation and talk of surpassing previous highs.
It didn’t feel good to take the profits when everyone was a happy cheerleader.
Many times, I end up getting stopped out at a level that I considered to be a reasonable area to take a profit, only to watch things move back up even higher! That certainly doesn’t feel good either. I had sold to early.
But I am going with the odds.
I’m going with my system.
It is uncomfortable and contrary to human nature to sell a position at a loss.
It is painful to admit that we “made a mistake”, that we were wrong. So many traders have what have been a small loss turn into huge, portfolio crippling losses that devastate a trading account.
I can certainly raise my hand in that regard from some of my decisions in the past.
But you have to make it a habit to fight the impulse to prove that you were right, take your lumps and sell when your trade hits your stop-loss. It doesn’t feel good to take a loss, but trading is as much about “losing” as it is “winning”.
And over time I know it works, even though there are those cases where a stock blasts higher than I ever thought possible. Certainly, I wish I had held. I kick myself a bit for it. But I’ve learned that it just goes with the territory.
in trading, it is more important to protect your account by limiting the big losses. That can be painful and uncomfortable, but it must be done.
Also, you have to resist the urge to quickly take quick profits, simply because it feels good to book them.
You don’t want to book small profits because it feels good and have large losses because it feels bad to admit that you are wrong. That is a recipe for disaster.
Small gains and big losses…good luck with that.
You need to make sure that over time, your profits are enough to offset and hopefully exceed your losses.
The bottom line: You have to feel good about feeling bad. Whether it’s buying or selling.
Related to this, let me share with you some quotes from a book called “The Master Swing Trader” by Alan Farley (I’ll review this book in an upcoming post), about how doing the right thing often feels like the wrong thing.
- “Discomfort and profit often stand side by side” – P. 66
- “Swing traders capitalize on the emotions of others after they control their own” – P. 8
- “Falling prices awaken fear. The rational mind sets artificial limits as profits evaporate or losses deepen. Corrections repeatedly pierce these thin boundaries and force animal instinct to replace reason” – P.8
The herd instinct and the human need to fit in and go along with the crowd feels good. It feels like the right thing to do. Maybe it helped humans survive waaaaay back in the day, but it is a sure-fire way to get killed in in the modern world of trading!
Oftentimes, it seems that in order to be a good trader, you have to fight the innate instincts of what it means to be a good human. 🙂
Have you ever heard of a “crowded trade“, where tons of market participants have the same or similar positions? That often happens because of the herd instinct. It feels good, right and logical to be in a certain trade. Often because everyone else is doing it. It can lead to large and long bull runs, and then sharp and rude reversals, such as the .COM bubble that finally burst in 2000 or the more recent Bitcoin/crypto decline in 2018.
It often feels good to go with the crowd. Comfortable in knowing that you have company. You have made the “right decision”….it is normal…everyone else is doing it…
Maybe.
MAYBE NOT
It doesn’t feel good to buck the conventional wisdom of the crowd. To be an outcast, so to speak.
But with trading, your success might just depend on doing what feels uncomfortable and unnatural.
It takes time to get comfortable with being uncomfortable.
I guess you never fully do become comfortable making the best trading decisions possible, but we have to try.
That is the challenge…to be a good human in life and a good trader at the same time!
-Glenn
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