Emotion Dominated Stock Trading

Where do you lose in stock trading? I have asked myself that very question more than once. Looking through my Excel spreadsheet where I keep track of my trades and looking through my trading journal where I capture significant points and lessons, I would say the broad answer for me is “eating the big loss” because I don’t follow my own trading rules which are superseded by emotion.

How does the big loss manifest itself? Well, it could be from entering a position with considerable risk such as holding past an earnings announcement where I assess that the earnings outcome should be good but alas it was not good enough so the stock gets punished by investors/traders.

Rule: Don’t hold a stock past earnings announcement.
Emotion: But they could have a really good earnings announcement.
You tell me which path should be followed without exception.

Once a paper loss is encountered, emotion army #2 appears (the first mistake induced by emotion was to hold a stock past earnings announcement). Well, I can’t possibly sell at this loss. Now we are in territory of “once wrong”, “twice wrong”. But if at first I don’t succeed, try and try again – this should not apply to repeating wrong decisions based on emotion.

I decide to supersede the rule to take the loss. Emotion army #3 kicks in. I come up with rationalizations to will the stock into rising. I must say that I don’t have any evidence of a proven correlation between my will and the stock price direction. I may claim that stocks rise on my will but I don’t admit to the cases where it doesn’t happen.

Well, look at the gap down open on the stock chart after earnings announcement. We know the gap has to be filled according to technical analysis. That is a true statement but the real question is how long will it take to fill the gap!

At this point, I’ve lost count of the armies of emotion attacking my thoughts from every conceivable angle. I make an entry in my trading journal to capture this event and the lessons learned. As I write “don’t take the trade that is known to be risky but if I have to, take the loss at the first point of incidence; don’t let the losses mount”, I face déjà vu all over again!

I won’t make those mistakes again. No, I shall not make those mistakes again. I’ve traded my emotions in exchange for candlestick technical analysis.

As I busy myself with all the post-mortem analysis, I continue to hold onto my losing position …

Mar 3, 2009 copyright © David S.Y. Wong, published in SelfGrowth.com