(by Teeka Tiwari)
Fighting the Herd Mentality
You see, our biggest enemy is not the market, but rather our own human nature.
The herd mentality is deeply ingrained in us at a genetic level, and it affects EVERYONE. Even the smartest, mentally toughest person you know will, in times of extreme stress and peril, revert to some form of follower/herd mentality.
The best traders I know haven't so much conquered this particular human peculiarity as they have instead created a strategy for dealing with it when it comes up. In psychiatry, this approach is called "cognitive behavioral therapy."
Now I'm no shrink, but I do know that I have learned to recognize the telltale signs of my own "buck fever," and have developed a strategy to talk myself out of making stupid decisions.
Stalking Your Prey
Recently, there was a stock I had been following very closely that I felt was primed for a major move. It already had made a quick 15% move up, but looked to trade higher.
When the stock was trading at $5 and change, I was looking for a move to $15; the nine-month $5 call options could be had for $105 per contract (as one contract represents 100 shares of the underlying asset).
Now, when I get the opportunity to make 10 times my money on an option play like this, I get excited, to say the least.
But as eager as I was to buy these options and position myself for what could be a major potential windfall, I was quick to bring myself back down to earth and examine the trade.
I punched up the stock chart and started seeing the stochastic readings begin to fall off. My greed said, "Forget it; buy now. Who cares? It's a 10-bagger! What's a few pennies count?"
At this point, warning sirens and red flags started going off in my brain; this is the signal that activates my cool, professional detached self.
The first thing I do when this happens is to tell myself to relax, forget what I want to happen and FOCUS ON WHAT IS HAPPENING. What is the stock telling me now?
Moving in for the Kill
Long story short, the stock was showing short-term weakness. I had a chance to get into the trade at a better price (which is always a good thing!). So, I backed off -- I acted like a pro and ignored my baser instincts.
Is this easy? No it's not -- it's very difficult. That's why the rewards from successful trading are so great. It's also what separates professionals from amateurs.
As I ratcheted back my enthusiasm, like a patient hunter who sees the prize buck he wants to bag, I sat back.
I sat back ... and let the game come to me.
For a while the stock just sat there … it even ticked up a bit, and my anxiety started to sharpen. Recognizing my rising anxiety, I reminded myself, "You've been here before. If it runs away from you, so be it. There will be another one."
I breathed deeply and calmed myself down.
And then it happened! The stock started to falter; the price slipped, and then started to slide. I knew it!
My patience and experience had paid off. As the stock price slid, so did the option prices, and boy did those options take a beating!
They started the morning offered at $105 per contract; by the afternoon they were bid at $65 per contract! My patience allowed me to buy almost 50% more contracts with the same amount of money, increasing my potential gain dramatically!
Was it worth the wait? You bet it was!
Watch Out for Traps in the Woods
Every trader falls into the trap of overtrading or overpaying. It's a hazard of the business. What I've found is that much of my own personal trading success has come from rebelling against my basic nature by buying when the world is selling, and selling when the world is buying.
This type of counterintuitive approach has generated millions in profits for my investors over the years. But it takes practice and patience to develop your own strategy, and remember: On any given day, the market could make you look like a complete no-talent hack or a trading god!
So, remember to position yourself in sectors with good long-term earnings visibility and long-term macro fundamentals driving the earnings picture. That way, if you're off on your timing, then the fundamentals of the group will bail you out.
