Fear and The Market 1 of 2

I have decided to post a weekly essay here on ET. After spending some time coversing with you folks, I feel that all of you can benefit from this. The ignorant and malicious are free to reveal themselves with replies that I will not acknowledge. The inquisitive and intellectually stimulated are invited to post constructive replies, and or questions.

"Its what you learn after you know everything that counts."

JW Marriott



ENJOY...


FEAR AND THE MARKET

By Jai Ramoutar, Jr.



There are many emotions that we as traders and market participants, must wrestle with in order to reach success in what we do. Now, I do not possess a license, certification or degree of any kind in psychology. However, I have personally managed to overcome many of the emotional obstacles, which erode and strip away our chances of becoming successful traders in each passing day, and helped many traders do the same. By far, the most damaging emotion is fear. Once a trader is overtaken by fear, their trading is now being led by that emotion, and those results can drive a trader’s self-esteem into the ground. If we don’t recognize it, we start second guessing and looking in all the wrong places: commissions, strategy, scanning, basket, astrology, etc. Our fear can affect just about everything we do in trading: opening a position, managing a position, closing a position, etc, etc. It’s almost as if “ether” is being released from the trading screen and we become stupefied, euphoric and somewhat paralyzed. There are many more ways fear affects us. However, fear cost us the most amount of capital. What is fear? Why is it so powerful? Fear like any other “trading demon” must be acknowledged, looked right in the eye, fought and then ultimately conquered.

Ok, fear means that we’re afraid of something. Let’s take a look at some of the things we fear or have feared. The boogieman, we believed that the boogieman was real, what’s really interesting, is that we were never introduced to the boogieman and don’t know what he looks like. Watching a scary movie, and feeling your heart pump faster as the squirming of the person next to you made you even more afraid, afraid of going to the dentist, buying the first piece of real estate, asking for a raise, telling someone how you really feel, telling someone you supervised that they were laid off, making your first trade, taking your first loss, taking your first profit, deep down inside being afraid to be successful, and so on and so on.

Do you see what’s going on here? What did we fear? We feared the unknown:

- Boogieman: never saw him, but the name scared us
- Scary movie: the music, the darkness, the director did a great job
- Buying 1st piece of real estate: what’s going to happen (what does happen) at the closing table
- Asking for a raise: Never having asked before
- Telling someone how you really feel: What will they think?
- Telling a subordinate that they’re laid off: Afraid of what they’ll say. Giving them terrible news
- Making your first trade: “Should I be entering here?”
- Taking your first loss: “Should I take this loss, or wait for it to come back?”
- Taking your first profit: “Maybe I should hold on to it, it’s going become more profitable.”
- Afraid of being successful: rising out of your mediocrity, leaving your comfort zone.

What do all of these things have in common? The unknown. Once we have been through one of the events (except the boogieman), we realize that our perception alone created the fear. After we have experienced the reality, we rise to a higher level of understanding. If we have to return to any one of these events, we have fear, but now the fear is controlled and regulated by our new approach, then the fear becomes caution. Right? I’ve been through several real estate closings; at the end of each closing I am wiser, and better prepared for the next. At the end of each trade, I am wiser, more empowered and better prepared for the next trade. Since I am very honest with myself, I can take an objective eye and analyze exactly what I did wrong. If you followed and adhered to your entry and exits, and the trade didn’t work, you did nothing wrong. There was one of two other factors that created the loss: first the trade was stopped out, and or two you didn’t set the right entry and exit points. That’s easy: you need to go back to your determination of entry and exit points. To correct that you need to get the right education. The right education is the one that works best for your approach, strategy and timeframe. What is the other factor? The market. You can’t control that and you never will. Losses are a part of trading and investing, and you must take the risk with the reward. Risk has a direct percentage relationship with reward. If you want low risk open a savings account with no more than $100,000 at an FDIC insured bank. What’s the reward there? Success is a journey, not a destination, as one of those motivational posters say. We will never be perfect, but if help the process, we will evolve. To achieve greatness, we must evolve. Again, I’m not a psychologist; I’m a trader and an educator. What I did learn is, there are some things we have complete control over, and many other things we can’t control.

 

The only way to increase control over a situation is to have control over each of its components. When I trade, I try to have control over as many components as possible:

- Technology: I learned about networking, firewalls, viruses, install memory, change hard drives, etc. Get comfortable with it, your livelihood, retirement money, and children’s education is hinged up on it. You may not be able to fix every problem, but you’ll be calmer. When something goes wrong, and you can’t fix it, learn as much as you can from the person that’s fixing it. If you don’t have an interest in learning it, make sure that you have someone who will get the job done…. the right way.

- Quote and Execution Platform: I must know my platform inside and out. I’ve been using the same platform for years, and I have taught so many people how to use it. Yet, I learn something new about it everyday. It’s a great feeling when you can identify a problem, and communicate it to the customer support rep (if you can’t fix it yourself). Soon enough, you may know more about the system than the rep does. One day you’ll ask the rep, “You’re new there aren’t you?”

- Money & Risk Management Skills and The Respect For Them: I can’t believe that there are still so many people out there, that hold positions and they have no predetermined entries, stops and targets, and reentries. That means that they have submitted to the market and they’re letting it control them. If you don’t manage your money and risk, it’s no different than sitting on a sailboat in the middle of the ocean, and letting the wind carry you.

- A Plan: This is one of the most important parts of becoming a successful trader or investor. This document is very much like a faith. The “Personal Trading Plan” takes all of the components and puts them into perspective. You need to establish, document, respect, follow and review every component of the plan to be successful. Its like the Code of Hammurabi.

- A List Of Trading Vehicles: Some people refer to this as basket, portfolio, universe, hit list, etc. I refer to it as the “Trading Stable”. I find it much easier to draw my candidates from a list of stocks that meet very specific criteria. The criterion is calibrated with my “Personal Trading Plan”. I do not envy other traders that invest time and money in scanning programs looking for the movers and shakers. I have nothing against it; I just find it easier to trade stocks that I know. I have said this for years, “The Trading Stable is very much like the people in my life. Once I feel pretty comfortable with them, trust them, and can predict how they will react in any given situation.” Now I’m not saying that you’ll predict what a stock, ETF or future will do, but you’ll feel much more comfortable with it, than trading or investing in something you have no “relationship” with. I know each stock in my “Trading Stable” intimately. I can’t remember anniversaries, birthdays or doctor appointments, but I know support, resistance, MA s, etc of those stocks.



When I was a teen, I remember my friend complaining about mathematics. He asked his father, “Dad why do I need math, I’m not going to need this in life.” The father said, “When you take over my company, you need to know math and watch the numbers.” My friend said, “Dad, we have a manager who does the inventory, he knows math, we have an accountant and he knows math. I still don’t understand why do I need math?” The father said, “How will you know if they’re robbing the company?” Now I’m not saying that the customer service rep or tech person is going to rob you, but you’ll be more at ease knowing what’s going on around you. Once you get your arms around as many components as you can, you’ll be on the road to improving your results. Look at this as a business. If you were a publicly traded company where would your stock price be? Would you go long or short yourself? What would the board of directors do, how would they vote? Now, what about trading?

When we trade we’re afraid of losing money, and that fear becomes stronger anytime we lose money. Losses are a part of trading they will always exist. We must assume a degree of risk in the pursuit of reward. So, in most cases it’s the risk that we FEAR. You know there is a risk, so why do you fear it? What most people FEAR, is the unknown. One way we can reduce or eliminate our fear is to know the unknown.

Now, we can perform some sort of analysis to arrive at some entry and exit points. If you do not perform any analysis of any kind, what are you using? Are you trading or investing by the seat of your pants, listening to and following someone else’s advice? In that case, you have everything to be afraid of, because you are in the abyss. One of the first ways to take control of your trades, is to have predetermined entry and exit points:

- Entry: Where will I enter, at what price will I open the position?
- Stop: At what price will I close the position for a loss?
- Target: At what price will I take a profit?
- Risk Reward Ratio: Is the presumed gain, better than the expected loss

The difference between the entry and the stop is the loss. The difference between the entry and the target is the reward. From there you can determine whether or not the trade or investment is worth taking by looking at and weighing the risk reward. It seems pretty simple right? Well it’s a lot easier than staying up at all hours of the night, trying to come up with formulas and test models. So many people belabor themselves to arrive at their win and loss percentage. The result of which will either be a negative reinforcement or a short-lived positive reinforcement. I’ve seen thousands of trading screens that had “spaghetti” all over the charts, and the traders still couldn’t answer those four questions….Entry? Stop? Target? Risk Reward Ratio? All technical studies point back to two things… price and volume. If you’re having a tough time, go back to the basics. Give it a sot. Now I don’t want to crush the grapes of anyone who has been working hard on scanning and test models, but I need to ask you this. Do you think Tiger Woods, Mark McGuire, Anna Kournikova, Patrick Ewing, Warren Buffet, and Bill Gates looked at their winning and losing percentages? I think they focused on becoming better at what they did. When they focused on that, the results improved. If they focused on the winning and losing percentages, they would ultimately stay locked in to those percentages, because their human instinct incarcerates them in the comfort zone or the status quo, and never become better at what they did. I knew I turned the corner as a trader when I stopped focusing on becoming a successful trader, and focused on making successful trades. I also reached the point many years ago when I set goals fro myself, “If I could make $500 day trading I’ll be happy.” Not to long after I said that, I made $500 in the first ½ hour. Then I was fearful to keep going. “Was I going back to the well one too many times?” What do I mean? What is the result of 72 successful golf strokes? What is the result of focusing on building an software operating system and having it on every PC? Do you get the idea? What would have happened if these people focused on something else, like their winning and losing percentage? Start focusing on making successful trades, and less on becoming a successful trader. Focus on predetermining your entry, stop and target. Think EST (Entry, Stop, Target). If you focus on predetermining EST, risk reward, sticking to EST, taking action, open the position, manage the position and closing the position (either at a stop or target) the net result will be successful trading. Focus more on the cause and not the effect.

Now let’s get back to risk and reward. When someone refers to this they always put the words in that order…risk…reward. Maybe you can explain what this is…3to1, 2:1? Why do they put the words in one order, and the actual ratio in the reverse order? Are they talking odds? I don’t think so. They speak one way, and think another. They think of the reward first. I think of the risk first, and then reward. I say it and think of it the same way…risk…reward…1:3. For every dollar I am risking, my reward is three dollars. My stop (risk) will cost me $1,000 and my target (reward) will yield me $3,000.

Now back to the FEAR, what an ugly word. Are you still afraid of it? Don’t be. Here’s how you can start minimizing it.

First and foremost, you must identify the risk, stare it right in the eye, and accept it. Once you have accepted your risk, you have absolutely nothing to fear. Now you might say that’s easier than done, but you know it will be much easier to become a successful trader or investor if you take as much emotion out of positions as possible. There is a little person in each of us, which does not want to succeed. The fear of success can sometimes be just as powerful as the fear of failure. We are afraid to come out of our comfort zone, afraid to become consistently profitable and successful. Part of that fear is becoming better and then continuing to raise the bar. We’ll always have to make the next trade or investment better than the one before it. To achieve success in anything we must overcome the fear of failure, success and becoming more successful.

The best methods, strategies, and systems are useless until you start tackling your fear. As I stated earlier, if you focus on the actions you take rather than the results you will ultimately improve the results. Sticking to your plan, adhering to your entry and exits, and proper education will minimize your fear, increase you confidence and make you a better trader.

I believe that once you have come to terms with this “king of the trading demons” the rest of the demons will fall like a house of cards…over time of course!

Be well!

Jai Ramoutar, Jr.

 

Are you the author of the posts? Why did you post these?

 

Yes, patefern, I am the author of these posts. I have put them here on ET for the benefit of the members, and make myself available to answer any questions.

 

I thought part two had some very interesting thoughts. thanks, I think I will reverse the way I quote the risk reward ratio now.

Question, do you always hold till target. I imagine with your experience you would be tempted to believe sometimes you just know the market conditions have changed so perhaps you should take profit now and not hold till target.

What do you do about that? this is not a challenge as just a question about a subject that is very hard to quantify and obviously what works for one trader might not work for a another trader. Perhaps you take the position as some do that your time is more valuable than micro managing a trade. I look forward to your insight.

 

I’m pleased that you found the essay interesting. I always hold until my target. My emotions of greed and fear have burned me to many times, so I stick the points and avoid situations that will cause my emotions to get the best of me. When the trade is pretty clear-cut and dry, I enter and exit with my normal size / exposure, and it’s fixed and does not change. That usually happens with breakouts above resistance in a downtrend, and vice versa. However, when all of the timeframes point in the same direction, I scale in and out of my positions, I have multiple entries and exits, and they’re all predetermined. The beauty of scaling is that it allows you to build a position, and your average price is always better than the panic side (assuming you average in correctly). This works well for me with swing trading, and for daytrading on days when I’m completely focused on day trading. So rather than look at a scaled position as one, I look at it as several positions. The scaled entries might otherwise be shorter-term exits. I get confirmation build an average price. I always average up on longs, and average down on shorts, never the opposite.

The short answer to your question is, yes. I always hold until the stop or the target. I’ve become more immune to the noise in between and just keep my head and manage the trade. If I am stopped out because of an anomaly, I take the loss and move on. Depending on what the circumstances are, I may re-enter, but not until I have all four questions answered. If a stock blows past my target on a long for example, I whack that bid ASAP. Good luck and thanks for the interaction!

 

Thank you Jai it was a good read.

 

I know when I make a trade, I always have and EST. I agree with not changing your EST during the trade for a couple of reasons. If you change your target or your stop during the trade for whatever reason. What will stop you from doing it next time? This leads to undisciplined trading......
I have found in the 2 of the last few trades I've made, that when the stock started heading towards my stop, I felt that it was going to hit it and I would get taken out. I wanted to get out bad, but I didn't - and yes, I lost more when it hit my predetermined stop. I learned from it though... My entry was bad and undisciplined. I was afraid I was going to miss out. I've figured out from my trading over the last 2 months that when a stock starts heading towards my stop, it gets taken out. It happens right after I make the trade. Same is true when I am right on a stock. I'm now working harder to only take trades that are really close to the support I'm using. (I am a support/resistance guy) That way I can actually raise my P:L ratio by taking smaller losses. That is how my next few trades will go anyways.....
RAMOTEUR - Do you ever use a EST, that you ride. Meaning, do you sell half your position at the target and let it ride. Or do you always stick to exiting the whole position? Just curious... My belief is that a stock that is going up, will continue to go up. Vice/versa with shorting. What do you think? I don't do this on every trade, just some of the one's I feel really good about. If you do, do you set another target for the half or go by feel? I have been going by feel on the half I ride. Now, of course I don't take a loss on it, I just use a trailing stop that I adjust. Like I said I'm support/resistance trader, so I try to get stocks that I think will actually break through resistance. Those are the ones I ride half on.
Thanks, good read......

 

Jai

This is a pretty post- little verbose and long- but eventually very sound .

More people like you less "animal" ruined by wht is NOT a gambling casino, but a HARD, DIFFICULT, 24 hours a day WORK.
AND WHAT HELL OF A WORK

 

Good post Ramoutar. I have realized that I have almost zero fear of losing trades. It is fear of "missing out" that is my fear. This fear is by no means out of control, but it does cause me to take the half ass trades that are part of my setup, instead of just waiting for the good ones. I am in the process of making my SPY 1 minute trend following system as mechanical as possible. That way, I won't feel like I am "missing out" if my system did not dictate the trade.