Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Apple, Gold, LinkedIn Charts: When a Trade Turns Into an Investment


When a security moves against you, should you hold tight or move on?

It almost always ends poorly.
Every day active investors scan the market for setups they like. Whether it's stocks, bonds, ETFs, futures, commodities, or currencies, there are a multitude of sectors and asset classes to scan and rank. And as we maintain, build, and invest in our running list of candidates, we constantly think about risk-reward and time frames. And it is within this context that we make decisions.
The Trade
If you are an "active" investor (a nice name for a trader of varying time frames), odds are that you inevitably approach some or all setups with a shorter-term time frame. Could be a day trade, to a matter of days, to a matter of weeks, but in any case, this type of setup is for a trader. If done properly, the trade is planned out: price(s) to get in, time frame locked, and price(s) to get out (stops).
So What Can Go Wrong?
The security moves against you, your stop is hit, and you take a loss and move on. Yup, this happens to everyone. Not a big deal because the systematic approach keeps you (and your capital) alive for other setups. This is harmless... as is being stopped out on a winner as it starts to lose momentum.
Traders lose their mental edge when they decide that they need to win at all costs. And this leads them to adjust their time frames and or price disciplines. 
A couple of examples:

  • The ego says that the setup is foolproof and still valid. So stops are lifted and time frames are altered. This is usually accompanied with new capital to further bolster a trader's fleeting conviction (and the losing trade). And the trader convinces him/herself that it's now a "good investment" -- until the loss either hurts too bad  or the investment wears him/her out.
  • Said stock does exactly what the trader wants. As the stock approaches its target, the trader gets greedy and misses the window of opportunity. The stock then falls and the mind says if I can just get back to where it was before... and bounces a bit, but falls short again... and so on and so on.
Professional traders realize that taking a loss is okay. They also realize that taking slightly less than target is okay as well (especially if the time window is collapsing and the technical setup has run its course).
Simply put, this is all about developing a process, building a plan, and sticking to it. Taking care of our capital takes care of our psychology (and keeps us focused on appropriate time frames).
I'll leave you with a few charts that highlight the danger in letting your discipline go:

 apple stock aapl chart
Click to enlarge

Click to enlarge

Click to enlarge
Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It MarketFind more insights into investor psychology here.

Twitter: @andrewnyquist
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos