Can’t Rape This

I am honored once again to be bestowed with this reign as King of The Peanut Gallery. I thank you all for your many comments and votes on my posts made last week. I am rather excited to know that the area I enjoy writing about most is actually what you are interested in reading. And so I will dedicate my time here this month to Trading Psychology.

I actually had another post ready but have decided instead to address today’s tape first and the various reactions that traders may have to it.

I have remembered how to play defense. Thank goodness! And so I managed to avoid getting raped in today’s tape.

I chat with several traders during the day and I am intrigued by the actions or inactions that we see on a day like today.
It seemed at first that the bulls were holding a strong defense even in light of a) the inability of Congress to raise the debt ceiling and b) poor jobs numbers. But alas the tape bid its bulls farewell as it decidedly slipped through multiple support levels, completely negating the breakout $SPX seemed to want only a day earlier. My guess is that the bottom of the channel will lend significant support at 1300 tomorrow, but if this doesn’t hold, look out below. http://twitpic.com/55l837/full

Anyone who knows me, knows that it takes a lot for me to take a bearish stance, so when I get negative, there is likely a reason or three.

Until the debt ceiling is raised, all bets are off and it seems very likely to me that this scenario could play out. Watching $SPX sell off, you would think that smart traders would drop any weak positions pending confirmation of a strong correction, but not all traders were on board with this idea today.

As the day played out, I suggested that it was a good idea to not only respect stop losses very strictly but also to take profits on winners that were showing weakness and I am rather proud of myself for adhering to this discipline. I dropped all but my strongest positions which included taking profits in some that were dropping such as $CBS. Rather than staying in just because it was still in a winning position; I chose to sell it before it became a losing position even though it was still well above my stop loss.

On a side note, stocks that maintain strength in light of the selloff are winners and the only logical ones to hold onto.

But I saw traders who allowed their positions to continue lower and lower while never selling out. It is very easy to justify a losing position when those pesky emotions step in the way. Our ego tells us that we must be right and this causes yet another psychological trader downfall – stubbornness.

In overcoming stubbornness as traders, we must be able to accept losses. We must come into every trade knowing that it can be a loser even if we have the highest probability thesis on our side. If we come into each and every trade accepting that it might not work, it can help us accept the loss and drop the losing trade while we still have our heads above water. While we can certainly set rules for stop losses and be disciplined about sticking to them, it can be harder to give up on a winning position that begins breaking down if we have not raised our stop loss.

In recent months, I had a few trades go horrifyingly wrong on me because I did not sell them when they broke down. Winners turned into losers. If I questioned a position initiated by “thebill”, I was assured that it was still ok, justified by moving the trend-lines lower than originally drawn. When I questioned this, he told me I was too hung up on trend-lines. I realize now that out of stubbornness he was changing his original thesis based on those original trend-lines. Fortunately, for today at least, I seem to have learned my lesson.

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