Emotional Mastery
Stockscores.com Perspectives for the week ending December 14, 2008
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In this week's issue:
The human mind is amazingly powerful. It has put a man on the moon, created pieces of silicone that can do billions of calculations a second, organized millions of people to follow red, yellow and green lights and, ironically, found ways to look inside itself. All amazing feats but there remains one thing that is more powerful than even the human mind.
That one thing motivates 100,000 people in a football stadium to cheer at the very same time. It has given one person the ability to kill millions. It gives two people the ability to create one new life. It can push a person to great power while many others languish in despair. Human emotion has had a greater impact on the world than even the products of the human mind.
You might say that they are the same thing, that it is the mind which guides the madness of men just as it creates a new way to power the automobile. I believe they are two very different things, one acts with rational precision while the other works with an unexplainable energy.
For the stock investor, they need to be understood as two very different forces. Your mind is capable of beating the stock market but it is your emotions that will lead you to mistakes.
Two people can have very difficult emotional reactions to the same thing. When faced with a loss in the stock market, one person might feel rage, yelling and screaming and looking for someone, anyone, to blame for the loss. Another might calmly accept the loss and resolve to learn something from it and push forward. One has learned to be angry while the other has learned to be calm. It is our lifelong conditioning that determines our emotional response and changing that conditioning can be a very difficult thing, something that even our powerful mind can not achieve.
Does it matter? Is one right and another response wrong? Any emotional response you have is only wrong if it works against your quest for some achievement. In the game of making money from the stock market, there are responses that are very wrong that must be overcome.
I could give you a trading system that, if followed exactly, should consistently make you money. Its rules may be easy to understand and its application well within your ability. Does this guarantee you would make money from it?
Sadly, the answer is no. There could be nothing wrong with the trading system you are using but if you do not have the right conditioning, if your learned responses to what happens in the stock market work against the rules of the system, you will fail in its application. Two people trading the exact same set of trading rules can have very different results because of their powerful emotions.
The question now is, do you want to let your emotions get the better of you?
The answer for most people is "yes, I do want my emotions to get the better of me." Most people won't admit it, but their actions indicate this is the answer. Most people do not take action against their emotions. When they make a mistake, they do not blame their emotions. They do not work to understand their emotions. They do not make a plan to overcome their emotions.
Traders spend countless hours analyzing the market, using their mind to develop a set of trading rules that work. They spend all of their time working on a plan to beat the market instead of putting in the effort necessary to teach themselves how to follow their plan.
I can not think of a successful trader that I have met who has a sophisticated set of trading rules. Oddly, the best methods for beating the market are simple. What separates the great trader from the loser is the ability to follow the plan. Some successful traders have just been conditioned to have the right emotional responses for making money in the market. Other successful traders have had to work very hard to overcome the lifelong conditioning that works against them in the market.
The point is, stop working so hard on trying to find the miracle trading system that will make you money. Start exploring the emotional reasons for why you suffer losses. Figure out why you sell your winners too early. Determine why you hold your losses so long. Understand why you take bigger risks after you take a loss. Know why you sit and do nothing when market conditions are ripe for profits.
Mastery of self will lead to mastery of the markets. You must also think positively about the market and your goals. It is better to say, "I am going to make money in the market" than it is to say "I am going to avoid losing money in the market." Your focus has to be on the positive outcome if you are to succeed. Golfers know all about this, the player who says "I am not going to hit in the water" often has a worse result than the player who says "I am going to land my ball in the middle of the island green."
Stop analyzing the market and start analyzing yourself. Find the solution to overcoming your mistakes through positive thinking and hard work and give your powerful mind a chance to figure out the right stocks to buy and sell.
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A break of a downward trend line is the first step in the reversal of the trend, every stock that transitions from a downward trend to an upward trend must do this first. Searching for stocks that are breaking downward trend lines is not a sure thing as many of them will fail in their attempt to reverse. Unfortunately, downward momentum is a strong force and it can take time to turn around.
As a trader, I like to watch for some sort of confirmation signal after the first break of the trend line where risk is well mitigated and the upside potential makes the trade worth considering.
Since many of the ETFs broke their downward trend line last week and then pulled back for much of this past week, I have been looking for a signal that the break of the downward trend line was no fluke. Friday gave us that signal as the markets opened down strong but rallied back to finish well above its open and up for the day.
Consider the following ETFs for a trade to the upside, if support as indicated below is broken on a closing basis then the trade is a bust and take the loss.
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1. XLF
Break of the downward trend line last week, pull back to the very short term upward trend line and a strong green candle on Friday indicates that the buyers are fighting to win the battle. Support at $11.25.
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2. XLK
Look at the chart of XLK and you will see the market hitting a new low the third week of November, a higher low the first week of December and now another rising bottom made Friday with a comeback from morning weakness. The market should move upward toward $17.50 with support at $14.70.
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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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