We have discussed how to buy, manage risk, and keep records. It will take a lot of work to implement these lessons—but this is exactly the kind of work that will put you ahead of the market crowd!
Now is the time to move on to selling. If every trade is a journey, you are better off traveling with a map. It will help you find your way to the target or return to the starting point and close out your position. A map does not guarantee success, but it will help you recognize when you get off track and must go back. A trader without a map is more likely to meander and waste energy and capital. Putting a plan on paper has a powerful psychological effect on most people. It reduces stress and increases profitability. We make our best decisions when we feel relaxed. Writing down a plan and executing it from a sheet of paper helps you reduce tension by separating the two jobs you have: analyzing and trading.
Give your “analyst” the luxury of peace and quiet, as he thinks and writes down his plan. Give your “trader” the luxury of simplicity in the midst of action—give him a map and let him run with it, focusing only on implementing decisions. Keep the two jobs separate. Let the analyst think. Let the trader execute. Let them work as a team instead of stepping on each other’s toes in some crazy dance.
The Psychotic Mr. Market
Warren Buffett, one of the most successful investors in America, is fond of saying that when you buy a stock you become the partner of a manic-depressive fellow he calls Mr. Market. Each day Mr. Market runs up to you and offers to either buy you out or sell you his share. Most of the time you should ignore the man because he is psychotic. Occasionally Mr. Market becomes so terribly depressed that he offers to sell you his share for a pittance—and that’s when you should buy. At other times he becomes so manic that he offers a crazy price for your share—and that’s when you should sell.
Buffett’s idea is brilliant in its simplicity, but hard to implement. Mr. Market sweeps most people off their feet because his mood is so contagious. They want to sell when Mr. Market is depressed and buy when he is manic.
We need to keep our sanity. We need objective criteria to decide how high is too high and how low is too low. Buffett makes his decisions on the basis of fundamental analysis and a fantastic gut feel. Traders can use technical analysis.
Adapted from Come into My Trading Room, by Dr. Alexander Elder,
John Wiley & Sons, Inc., 2002
You can view this section of the book as a menu for sellers. You may choose just one item that appeals to you and make a good living from it. Or you may choose several approaches to selling and combine them.
Some of the menu choices are more appropriate to different market conditions. Some methods will be easy to combine—such as using both a profit target and a stop-loss order. Other tactics cannot be readily combined—you can sell at a nearby channel line or at a faraway resistance zone, but not at both. Just as in the kitchen, some items on the menu will go well together, while others will not. This is why you need to be clear in your mind as to what method you’ll use for selling. It will pay to write down your plan.
You also need to be clear about your timeframe for selling. Are you putting on a position trade whose duration will be measured in months, a swing trade that will last a few days, or merely a day-trade?
If this is a day-trade, you’ve got to have your finger on the trigger as you sit in front of the live screen. One of the worst mistakes of chronic losers is to a convert a day-trade gone bad into a long-term position. On the other hand, watching a live screen is usually counter-productive for a position trade. A trader who watches a live screen almost always loses his position by getting out too early on some minor signal, and misses the big trend he was aiming to catch. Clarity is a virtue in trading.
Now is the time to move on to selling. If every trade is a journey, you are better off traveling with a map. It will help you find your way to the target or return to the starting point and close out your position. A map does not guarantee success, but it will help you recognize when you get off track and must go back. A trader without a map is more likely to meander and waste energy and capital. Putting a plan on paper has a powerful psychological effect on most people. It reduces stress and increases profitability. We make our best decisions when we feel relaxed. Writing down a plan and executing it from a sheet of paper helps you reduce tension by separating the two jobs you have: analyzing and trading.
Give your “analyst” the luxury of peace and quiet, as he thinks and writes down his plan. Give your “trader” the luxury of simplicity in the midst of action—give him a map and let him run with it, focusing only on implementing decisions. Keep the two jobs separate. Let the analyst think. Let the trader execute. Let them work as a team instead of stepping on each other’s toes in some crazy dance.
The Psychotic Mr. Market
Warren Buffett, one of the most successful investors in America, is fond of saying that when you buy a stock you become the partner of a manic-depressive fellow he calls Mr. Market. Each day Mr. Market runs up to you and offers to either buy you out or sell you his share. Most of the time you should ignore the man because he is psychotic. Occasionally Mr. Market becomes so terribly depressed that he offers to sell you his share for a pittance—and that’s when you should buy. At other times he becomes so manic that he offers a crazy price for your share—and that’s when you should sell.
Buffett’s idea is brilliant in its simplicity, but hard to implement. Mr. Market sweeps most people off their feet because his mood is so contagious. They want to sell when Mr. Market is depressed and buy when he is manic.
We need to keep our sanity. We need objective criteria to decide how high is too high and how low is too low. Buffett makes his decisions on the basis of fundamental analysis and a fantastic gut feel. Traders can use technical analysis.
Adapted from Come into My Trading Room, by Dr. Alexander Elder,
John Wiley & Sons, Inc., 2002
You can view this section of the book as a menu for sellers. You may choose just one item that appeals to you and make a good living from it. Or you may choose several approaches to selling and combine them.
Some of the menu choices are more appropriate to different market conditions. Some methods will be easy to combine—such as using both a profit target and a stop-loss order. Other tactics cannot be readily combined—you can sell at a nearby channel line or at a faraway resistance zone, but not at both. Just as in the kitchen, some items on the menu will go well together, while others will not. This is why you need to be clear in your mind as to what method you’ll use for selling. It will pay to write down your plan.
You also need to be clear about your timeframe for selling. Are you putting on a position trade whose duration will be measured in months, a swing trade that will last a few days, or merely a day-trade?
If this is a day-trade, you’ve got to have your finger on the trigger as you sit in front of the live screen. One of the worst mistakes of chronic losers is to a convert a day-trade gone bad into a long-term position. On the other hand, watching a live screen is usually counter-productive for a position trade. A trader who watches a live screen almost always loses his position by getting out too early on some minor signal, and misses the big trend he was aiming to catch. Clarity is a virtue in trading.
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