Glenn Stok writes about investment and risk-control strategies he perfected during 45 years trading stocks, options, and futures contracts.
Once invested in a trade, it’s not easy to remain objective. We are subject to the whims of the market, and therefore we will tend to let emotions get in the way. The trick is to have an exit strategy. I'll explain all this to help you improve your overall trading success.
When your trading decisions are subject to market moves, you become biased. This subjective viewpoint can negatively affect decision-making because it’s based on feelings and opinions. That’s why you need to remain objective.
This list of synonyms for objective and subjective will make the difference clear for you.
Objective vs. Subjective Trading
I find it’s always best to plan your strategy and stick to your plan. That’s staying objective, and it's a more mechanical method of trading. It eliminates the emotional feelings of fear and greed that occur with subjective trading.
We can only view the market objectively when we are not involved in a trade. That is when we have a more obvious vantage point.
When we are involved with a trade, it becomes challenging to have a clear head and make objective decisions. Subjective emotions related to the investment interfere with having a clear and detached objective view.
While you are involved with an active stock trade and watching the fluctuations of your account, subjective rationalization hinders sound judgment. We try to rationalize our next move without realizing that fear and greed are actually guiding us.
What Happens When You're Subject to Fear?
An intelligent analysis of the market is done better without being invested in the outcome.
As long as there is no fear of losing, you can analyze the data and determine what to expect the market to do. That means you can consider what may happen based on current market conditions.
When you're already involved in a trade, you're doomed to being subjective, hoping for the market to do what you want it to do, rather than doing what analysis and due diligence would lead you to expect.
What Happens When You're Subject to Greed?
This is a terrible position to be in because this is where failure to be objective can get in the way of success.
How often have you had a trade go against you, and you think to yourself that it will turn around, so you wait? That’s not being objective at all. You’re letting your emotions control the situation.
Your decision to do anything is subject to your greedy feelings. You can’t admit that you may have been wrong, and you let a losing trade get even worse.
Another time greed can cause you problems is when you have a nice profit and refuse to take it. You leave the trade hoping for more. You think to yourself that if it’s doing so well, it will continue. That’s greed!
Stocks always have only a 50% chance of going higher. That never changes. Just like when you flip a coin, it has a 50/50 chance of being heads or tails. If the coin comes up heads five times in a row, it’s still only a 50% chance that it will come up either heads or tails the next time.
It’s the same with any investment. If a stock continues to climb, it still only has a 50% chance to move another tick higher. Your greed keeps you from selling and taking a nice profit, and you end up giving some of it back.
We need to have some way to remain objective at all times when involved in a trade.
How to Remain Objective by Trading Mechanically
Trading mechanically helps avoid being subject to emotions. It helps to be consistent with successful trades and not become subject to changing market conditions. It means to have a strict method to follow, no matter what happens.
If we have a strict strategy and follow that method without letting our emotions, greed or fear, change our plan, then we can remain objective, and we won’t allow the market to affect how we handle our trades.
That method is being mechanical. It follows a specific procedure for managing an active trade to completion, either with a gain or a loss.
Mechanical trading requires strict adherence to these rules:
- Plan your entry price and wait for it.
- Plan your exit strategy and obey it.
- Plan any other triggers that will dictate reasons to get in or out of a trade. And stick to it when it happens.
- Decide what risk/reward you want and structure your portfolio accordingly.
- Use stop losses to control your mechanical behavior.
- Admit when you’re wrong and get out. This one is hard to do persistently. I still fail at it from time to time.
- Pay attention to your overall exposure. Keep your trades small enough so that significant market moves don’t force you out.
Mechanical trading is the only way to avoid fear and greed. It took me many years to learn this. It took me even longer to learn to be strict about it. I eventually discovered several rules that help maintain an objective view of my investments.
Rules for Trading Success
If a trade doesn’t look good, don’t do it just because you hope it will work. Here are several rules to keep in mind:
- Patience: Be patient and wait for a more reliable trade to be available. Trade selectively.
- Avoid Hoping and Wishing: Don’t enter or stay in a position just because you hope it will work out. Do your homework; analyze the company, and trade based on performance.
- Loyalty: Don't be loyal to a trade position. When you think you’re wrong, get out! Don’t let a lousy position get worse. It may turn around, but that’s just wishing and hoping.
- Size: Don't increase position size just because you’re making money. Keep trading the same amount. If you keep increasing the size, that time when you eventually lose will end up being on a bigger trade, with a more significant loss.
- Frequency: Don't trade merely to be active or to get another small gain. Remember the rule about patience.
What Have You Learned?
We can suddenly become subject to assumptions and unrealistic expectations when we are in a trade.
The only way to have a clear objective strategy is to plan the trade ahead of time and stay mechanical while managing it.
The results will be better, and you’ll have a decent chance of being profitable.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 Glenn Stok