Exhibit A - your bruised and bloodied ego after the markets have shown you who is always right. (hint - it ain't you or me)
I don't know anyone that can predict what the market is going to do. And to set yourself up for psychological beatings time after time is a sure way to run your trading account down to zero. But, says you, "it's a perfect set up, the stars are aligned and maybe even some trusted analysts are touting the stock to X$ level." All you are doing when you subscribe to this train of thought is to CONVINCE yourself that you know what the future is. And there is a huge difference psychologically between convincing yourself that an event will happen, and believing in the probability of an event happening.
To demonstrate these two approaches let look into this summary of two traders named Bob and Cindy.
-Bob buys 1000 SKF @$250 and a sell target of $300. (secretly $500)
-Cindy buys 1000 SKF @ $250 with a stop at $249
- an hour later SKF hits $260. Bob is thrilled and says to himself , "Booyah, I'm right" He does a victory dance and dreams about a new Ferrari.
- Cindy sells SKF and pockets $10K. She then shorts it and says to herself "way to take those profits girl" High 5.
- SKF is sliding down so Bob checks his fundamentals and reaffirms that SKF should at any moment shoot back up.
- Bob buys more SKF to average down his cost.
- Cindy moves her stop lower to protect profits should SKF suddenly and violently reverse.
- At the end of the day Bob checks various chat rooms that forecast SKF going to "at least $300. He feels better and says to himself " I'll get out at $290 then".
- The next day SKF opens @ $220. Bob picks himself up off the floor and looks stunned into his flat screen monitors. He can't even think right now.
- Cindy covers her short sale, putting a huge chunk of $ into her account.
- Bob can't remember his plan or what to do. But he rationalizes "well it was a good buy at $250 so it's a screamin' good buy now." And he proceeds to buy more @ $218, $212, $207, and $190.
"I mean it has to go up, the banks are in a real mess. This is a fact!!!" He shouts at no one in particular.
- Cindy acknowledges SKF is making big red candles moving down so she shorts it again almost immediately after covering her first short. She doesn't even consider the additional $10 in commissions.
- Bobs brokerage firm gives him a margin call. Bob and Bobs life is destroyed. Reality has overtaken fantasy in his life.
- Going into the close, Cindy is thinks it is wise to cover her short. She admits" I don't know what tomorrow will bring" as she leafs through a brochure on "Great diving destinations in the South Pacific"
Ego will destroy you as a trader and possibly a human being when you are wrong after you convince yourself you're right.
Hoping and wishing will not make the market do so.
How many beatings can you take before self doubt creeps in, effectively paralyzing you as a trader?
Profit targets are just one more nail in the coffin of traders who think they know.
Try this approach instead. Say to yourself,
"I don't know what a stock will do in the future."
"No one on TV, or on web sites or newspapers know what a stock will do."
" Based on past patterns, the charts and prices tell me now which direction is more PROBABLE."
"I do know my risk amount so I will set a stop at that point."
Now sit back and let the market do it's thing.
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