Chapter 3-4 Trading Behavior

Trading stocks that adhere to your strengths, while avoiding stocks that harp on your weaknesses is a key to success. It is imperative to understand how you are likely to behave under various circumstances that occur often as a trader.

How do you typically act when the following scenarios occur?

a)      You are up significantly on a trade.

Do you get anxious and seek any reason to exit to ensure locking in profit?


Do you sit back and look to turn the trade into a “home run”, sometimes causing you to forfeit unrealized gains?

b)     You are up a substantial amount on the trading day.

Do you sit back and try to avoid trading in order to ensure a winning day?


Do you vigorously seek out more trades, sometimes causing you to churn and give back more than half of your profits for the day?

c)      You are down significantly on a trade.

Do you get really mad at yourself and exit the position as soon as you can, regardless of what exit price you may receive?


Do you find yourself holding onto the position for dear life, contemplating doubling down to improve your average price, using hope instead of reason?

d)     You are down a substantial amount on the trading day.

Do you sit on your hands, scared to trade anymore that day for fear of losing more money?


Do you frantically try to find any trade possible in an attempt to recover your losses?

In all of the above scenarios, both psychological extremes are identified.  It is normal to express characteristics described in these scenarios; however, a successful trader learns how to suppress those tendencies and instead act upon the situation at hand with reason, not emotion.

Here are some reasonable solutions to the before-mentioned scenarios:

a)      You are up significantly on a trade.

Look to take some profit (exit half of your position) during the first true sign of weakness (ex. sudden turn in price action).  With the remaining shares seek to place a stop behind a key level, moving average, or trendline, but still in-the-money on the trade.

b)     You are up a substantial amount on the trading day.

Stay aggressive as you are clearly trading well under the current market conditions.  However, if you find yourself stringing together a few losing trades consider stopping as the market may have slowed down and become difficult to trade.  Try to always walk away with over half of your profits when up substantially on the trading day.

c)      You are down significantly on a trade.

Always try to cut your losses as soon as possible.  You can always reenter the stock again at a later time if it deems worthy.  Try to avoid moving your exit back in order to stay in a position as this often leads to greater losses.  If you do unexpectedly find yourself down a significant amount, quickly seek a nearby level, moving average, or trendline that can provide aid.  If you can’t find any, then exit immediately at the best available price.

d)     You are down a substantial amount on the trading day.

You never want to lose more than you can realistically make back the following day.  Therefore, try to manage your profits and losses wisely.  Keep your losses as small as conceivably possible without hindering your opportunities for profits.  If you find yourself stringing together a few losses, then slow down your trading.  Enter into only the absolute finest trading setups you discover.

Trading is just as much an art as it is a science.  That art involved with trading, in large part, is due to emotion.  A trader must embrace and conquer the psychological struggle in the market and seek to successfully use it to his advantage.  For when a trader is clouded with emotion he finds himself straying from fundamentals.  It is at that point when reason is gone and poor decisions occur.

Personality types that conflict with logic when trading

Over Aggressive – Over trades (churns) during the trading day, recklessly throws too many shares into positions, averages losing positions by doubling-down, seeks “home run” type trades.

Too Passive – Scared to trade, fears losing money, often exits position prematurely, often enters position with smaller share lots than allotted.

Too Lackadaisical – Not prepared for the trading day, doesn’t actively seek out trading opportunities, doesn’t analyze trades after exiting positions, and doesn’t express eagerness to succeed.

Over Emotional – Overly concerned about losing money when trading, doesn’t allow reason to dictate decisions when trading, fearful of the market, expresses abnormally large highs and lows of emotions correlated to his trading performance.

Two problems that routinely interfere with a trader’s mindset

Over Confidence – Researchers have found that often people consistently overrate their abilities, knowledge, and skill, especially in areas outside their expertise.  Traders must seek and weigh quality feedback and stay within their circle of competence.  Do not trade outside your capabilities.

Skewed Perspective – In considering a decision, often traders disproportionate weight to the first information they receive, hence, anchoring their subsequent thoughts.  They often mitigate this risk by seeking information that supports their existing point of view while avoiding information that contradicts their opinion.  When considering a trade, try to allow logic to dictate how you interpret the information presented, not opinion.

You will find that most can understand the fundamentals of trading and all the trading setups that come with it.  However, few can accurately grasp the mindset needed to effectively trade the market.  Below are qualities a successful trader often posses.  These traits must be practiced each and every trading day as they are the underlying edge that separates an average trader from a great trader.

Characteristics of a successful trader

  • Takes work seriously, but doesn’t bring emotions from work home
  • Aggressive, but not reckless with shares or losses
  • Passionate about trading, but doesn’t allow emotions to sway reasoning
  • Seeks information from numerous sources (tape, chart, sector, etc.) and weighs the information without bias
  • Continually examines and analyzes performance in order to identify ways to improve

Seek to improve each and every day you trade.  Learn from your mistakes, as well as your gains.  Review every single trade you make.  Analyze what happened before, during, and after you made that trade.  Contemplate what you did that was effective and what you could have done better.  These valuable thoughts are often forgotten once the trade is over.  However, these thoughts provide precious insight on ways to improve.  Strive to learn as much as you possibly can from each trade you make.  This will ultimately help you understand and improve greatly as a trader.  No one will ever be able to teach you better than yourself.