Let me start with some examples:
You followed your trading system, you took a long trade and was stopped out. As it turned out, you were stopped out right at the bottom of the intra-day low (or daily chart if you preferred). Price began to climb back up per your trading system original thesis which was to go long.
“Sh*t! Stopped out at the low again! I knew it! Why did it have to happen to me! Now the price is going back up; if I’m jumping back in, I’ve to pay higher price than I stopped out for. Sh*t, it just took out the yesterday high! Damn, I can’t jump back in with this price! It’s more expensive than when I first got in.”
“Hooray! My thesis (aka as trading system signal) is still on after all. Price took out yesterday high! There may be a chance I can make this trade work. 3x profit here we go! [Click, click and click] Just bought back some close to yesterday high. I’m going to put a stop below today intra-day low (or day low if you preferred). Now, let’s kick some ASS!”
Price reached your profit target but reacted suddenly so you gave up a point. Per your system, you should take your profit now. Even though you gave back a point, you still made 5 points profit.
“I want that point back! I’m going to wait for price to go back up there before I take profit.”
“Holy Smoke! That was a sudden 1 point drop. I’m getting the fuck out of here with my 5 points profit. Adios!”
Price reached to a point where you should be taking your loss. You only have a mental stop because you didn’t put on a physical stop for whatever reason.
“Holy shit! I’m not sure if I want to take my loss here. I’m afraid I’ll be selling at the bottom. Yesterday down day was already over-sold. Fuck it, I’m not going to sell now and have to buy back at a much higher price later.”
“The train stop here! I’m putting a market order! Come on… come on… get me fucking fill already!”
This is actually a week later after example 3 above. Prices were down all last week. Per your trading system, you should have taken your loss last week based on example 3 above.
“I’m fucking dead already! What is the point in selling here now? If I sell here, I’m definitely selling at the bottom. I’m going to wait for that Hail Mary piss on your face rally that is gonna get me back to the price I wanted. Come on, give me your shit! I’m not afraid anymore. I’ve resigned my fate to the stock god now. ”
“What are you looking at me for? What? What did I do with the stock? I don’t remember, didn’t I sell it last week already?”
The way I see it, we always carry our past with us in our head. Because of all the history, we tend to compare our current action against the past. Perhaps, in some perspective, it can be beneficial because it helps us to avoid repeating past mistakes. On the same token, this “comparison” of the past can also hamper our trading success. Perhaps due to our genetic programming or cultural upbringing, when $$ is involved, we start to compare prices. And when we compare prices, we somehow automatically enter into a “bargaining” mode in our head.
For crying out loud! Do you really want to bargain while trading?
Below is my take of unproductive thinking when trading:
– if I cut my loss now, I may end up paying more to get back in. Definitely not as good a deal if I hang on with my original entry price.
– I loathe to pay the the whip-saw prices for jumping in and out.
– I probably have to pay higher price to get on board. Price hasn’t taken off yet but may soon be; but I think I can count on saving a few penny here to enter. (Meanwhile, you are completely obliviously to the dollar the trade can give you.)
Listen, in trading, getting a bargain is SECONDARY to survival! When you bargain in the business world, you have the luxury of holding off your purchase until you negotiated a price which you think is a good bargain; but in the trading world where the health of your portfolio is hanging in balance based on the decision you make, sometimes your getting “pissed” at losing a bargain and trying to hold out for a better price can cause even more harm than good. Not to mention that you are not cutting your losses quickly but also giving up great opportunity to lock in gain because you are trying to bargain for a good price.
“I refuse to get out until the bargain price I wanted come back!”
“I refuse to get in until the bargain price I wanted is filled!”
Good luck! ’cause we don’t know if the bargain price you want will ever come back!
Now, tell me. Are you trading or are you bargaining?