Markets

Trade with your brain, not your emotions

Making the right trade isn't always fun. Sometimes it feels viscerally wrong.

For instance, a week or two ago while chatting on our InsideOptions Pro form, I quipped: "I don't want to do it and feels terrible, but I am buying more TNA now." (The stock is a leveraged ETF that some of us like to trade for short-term moves.)

Other users on the forum laughed and acknowledged the sentiment. At that particular moment, my intellect told me to expect higher prices because stocks had snapped back from below the August lows and earnings season was approaching.

I had grown accustomed to selling at the top of the range during August and September and had visions of another 2008 collapse. My fears and emotions urged me to take my profits amid strength as the S&P 500 pushed higher.

Instead, I listened to my head and my reasoned expectation of what I thought would happen. I added to my longs and profited nicely--even as other people on the chat unsuccessfully tried to short the move the whole way up.

Both Sun Tzu and Mohammad said that "war is deception." Well, financial markets are at war with your capital and your head. They bob and weave like a prizefighter, trying to lure and confuse us before delivering a knockout punch. Stocks play head games, sapping our conviction to buy or sell at precisely the moment when it makes sense to do so.

A recent case in point: precious metals. Silver collapsed back in May, and I told some trading friends that I thought it was going back to $30 before it returned to the April highs of $47-$48. So what did I do? I sat on the sidelines for most of the spring and summer, then started to doubt my own chart work and eventually tried to get long in early September.

That was obviously a mistake, because silver would soon crash once again, and this time it found support at what price? That same $30 I had coolly and rationally identified several months earlier. (Which, I should add, I liked because it was a peak from last December and January.)

The lesson: We should all try to determine the areas where we're good and stick with them.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Oct. 26.)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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