20.0 Mind Games

If you want to be successful in the stock market, you have to be really good at mind games where 1) understanding and riding market sentiments correctly and 2) having the ability to make tough and decisive actions account for probably more than half of your success or failure. The other half or lesser percentage is accounted for by your technical skills, be it in fundamental analysis or chart reading. A small percentage is given to luck. After more than a year of active trading, I arrived at this surprising conclusion. Surprising because market sentiment and trader psychology were not given prominence as topics of interest in the certification program I enrolled in (See Blog Post No. 8, "Back to School") more than a year ago. While this may have come a bit belated, it still is never too late to be useful for me in  my next trades and for any neophyte trader who cares to profit and prosper in this profession. 

 

In my previous trades, I basically relied on technical analysis in screening stocks. I tried coming out with different stock selection methodology for uptrends, downtrends, sideways, reversals and pullbacks but the result is always inconsistent (See Blog Post No. 18, "Staying Alive") . Sometimes I won and sometimes I lost and lost badly I did in not a few occasions. So what gives?

My misplaced belief that technical analysis is the only tool to having winning trades is what gives. I totally disregarded general and specific market sentiments here and abroad and doggedly bought stocks that my stock selection methodology screened out for me even when the market was down. When the market is bullish my stock selection methodology is validated and I have a winning trade. But when the market is bearish I end up having a bad trade and am left  questioning my methodology.

Realizing this, do I now throw technical analysis out of the window? The answer is no. My technical analysis is not wrong but market sentiment tells me that the timing is off. This is the one missing ingredient all these months. If I have to make an analogy, it is like figuring out correctly that the girl you were eyeing on also had hots for you but  things fell apart because you asked her out at the time she had dysmenorrhea.  Not being able to understand market sentiment will make you lose money and disregarding it totally will make you lose your head. Wrong timing, even when the analysis is right, equals bad trade.

Now, how do bad trade become worse? The answer is bad trader psychology. Because I was not prepared to accept trading mistakes, I stubbornly held on to these stocks even when they continued to go down. Cutting losses was not in my vocabulary arguing these were just paper losses.  I simply watched my portfolio as they lost market value instead of taking decisive action to stop the bleeding. I always told myself things will be better but every passing day it did not. Those days were filled with great anxiety and it certainly hurt my pride.  

But why did I not do anything at all? That is because in my mind there is a little angel and a cute little devil playing games. The little angel is telling me to cut losses and move on but the cute little devil is telling me to hold on and just enjoy the pain. As was the case, the cute little devil almost always won. But this is no longer now; I learned my lesson well. I say not anymore, never.