Emotional Carry Forward
Stockscores.com Perspectives for the week ending September 24, 2005
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In this week's issue:
Emotion takes many forms in the trading of stocks and is nearly always destructive to your trading success. We sell stocks that are going up too early because we want to feel good about making a profit. We hold on to losers because we want to avoid the pain of losing money. Another common affliction is to attach emotions to a specific stock and carry those emotions forward in a destructive way.
Have you ever lost money on a stock and vowed to never trade that piece of garbage again? You give the stock a soul, assuming that it was out to get you and must therefore be avoided like a person that has proven to be a bad character. And then you watch that same stock follow through with a great trend after an obvious buy signal. You miss out on the opportunity because you carried your emotions forward.
Carrying forward is a common problem among traders and takes other forms. Have you ever taken a questionable trade after suffering a loss? You want to "make back" the recent loss and take away the pain you associate with it. This brings you to take on a gamblers mentality with subsequent trades and usually leads to further losses.
What about scrapping a proven strategy? Have you ever given up on something that was working well because it went through a short losing period? Our confidence can be broken by a short term losing streak even though its long term viability might remain. We end up searching for a new strategy and ignoring the one that was well proven.
We need to understand that every stock trade is its own event, regardless of whether that stock has been recently traded before or not. Using good analysis, we should always judge a stock for its merit and not based on what may have happened in the past.
Recognizing the symptoms of emotional carry forward is relatively simple, finding its remedy is not so easy. The first thing you have to do is catch yourself when your emotions play a role in your trading decision. If we trade long enough, most of us will become familiar with the anxiety that comes with an emotional decision. If you feel anxiety, it may be that you have made a decision that you don't trust.
My best trades are the ones where I just don't worry about at all. I have such faith in my analysis that I feel no anxiety about the outcome of the trade. Perhaps it is my subconscious knowing that my methodology has been applied with perfect and unemotional precision. I believe in what I have done.
When some emotion has weighed in to my decision and affected my judgment, I tend to feel unsure and find myself checking the stock more than I normally would. I have less faith.
Regardless of your past experiences with a stock, strategy or market, we need to work at building our confidence in our methodology and practicing its rational application. Good traders don't care about the decision because they know they have made the right one. If you are not confident of the decision you are making, then you should not be making it.Back To Top
Market volatility is the best determinant of uncertainty. Stocks that trade with a good deal of volatility do so because the market is unsure about the value of available information about the company. So, market participants argue back and forth by buying and selling the stock, and eventually come to some consensus on the value of the company. As they do so, volatility is reduced, and the stock enters into a consolidation. Breaks from these consolidations often preclude strong directional moves.
Stocks that consolidate are a demonstration of increased market confidence on the value of the company. Where there is strong consensus, there is certainty. For a stock to break out of one of these consolidation patterns often requires significant new information about that company's future earnings potential. By taking a position in a stock that is consolidating, we can get in before the start of a significant move and minimize risk because we are taking a position in a stock that the market has confidence in regarding its price.
The direction of the breakout from the consolidation pattern is often indicative of the near term trend. Generally, we can anticipate the move of the breakout based on the type of consolidation pattern we are seeing by looking at the chart to see if rising bottoms are falling tops are present. Rising bottoms are a sign of optimism, and tend to lead in to breakouts. However, at the point of breakout, we can also see very quickly if our expectations were correct and minimize losses if we are proven incorrect.
This week, I ran the Optimistic Consolidations and found a number of stocks that are worth watchingBack To Top
1. T.TAH
T.TAH broke its downtrend late in July and has been consolidating at a rising bottom since then. Price volatility has become very low over the last week so I think it is good to watch this stock for a break up through short term resistance at $0.44. The Sentiment Stockscore has just crossed over 60 indicating optimism is growing.
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2. T.NLG
T.NLG has been in play for about a month and is now consolidating right under its highs at $3. We may see it pull back from this resistance but I think it is only a matter of time before the stock makes a break through $3 and continues its up trend. Watch for the breakout.
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3. T.COM
T.COM has been forming a rising bottom consolidation over the last few months, indicating that optimism is growing for the company. I think a break through $9 will set up a nice swing trade as the stock has good potential to then run upward to the next level of resistance at $11.
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4. T.TD
T.TD is in a long term up trend but has been trending sideways for a few months under resistance at $57.50. I think the stock can make another step up if the stock can break through that price point. Watch for the breakout and look for an increase in volume on the breakout day as further confirmation.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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