Cardinal Sin Moments - Escape from Mental ALCATRAZ

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I read an article on my friend Dan Cummisky's blog today about "Oh Shit Moments"  and that nearly happens to everyone. His article is a good reminder to how the market serves you a "Whack on Head" on even the best looking charts and Dan reminds us why position size is important. Dan's article prompted me today to take profits on my positions today as those moments come back to haunt you.  So after I took profits, I was writing in my trading journal and then I thought of writing this below article as part of leaning material for my members on my premium site. 

Nearly all traders experienced or novice have experienced this many times and over..

Imagine you're an investor and you've just bought a stock for $100. The stock rises to $110 and you're very happy and dreaming about a new car or a vacation in Caribbean and you don't take profits.

The next day you see the stock is now at $108, and you're still very happy thinking that is is just a little pullback. and there is more upside to this. ”

The next day the stock is at $103 and you are annoyed at yourself that you now have only $3 of profits. You plot Fibonacci retracements or some other indicator to see what is going and convince yourself that this is just a normal market shakeout and you are not going to grind it out.

Two days later the stock is at $95. and you say WTF ?  and then you really start smoking that dreaded hopium thing. “There's no way I'm selling until I get back to breakeven.” You remind yourself of Warren Buffet quote.. Rule # 1: Dont sell anything for loss and Rule 2: Dont forget rule # 1.

You have committed a cardinal sin of allowing profits to turn into a loss.  

I have been guilty of this many many times and I try to escape out of this psychological prison (I will give you my escape plan later in this article).

Next time this happens,your great experienced mind kicks in !!!!

You buy another stock, again at $100. The stock rises to $110 and this time you sell the entire position and then quote Jim Cramer saying.." Bull makes money, Bears make money and Pigs gets slaughtered" or even better one.. that 'No one has gone broke taking profits".

Some of the fellow traders will tell you "Good job" .. and advise your to now rise and repeat..

In theory this sounds very good. But in real life.. you might notice have sold your horse to buy a donkey as next trade does not work out while your original trade has now gone to 150..

Now the Real RINSE and REPEAT comes ..

Now you start acting like smarty pants, you vow that you will never ever let that happen. You post things on your trading wall or your desktop as reminders.Now when another instance comes, where you have your $100 stock has moved to $110  you mind is all baffled on what to do. You risk repeating the first scenario all over again, allowing a decent profit to turn into a loss.

In the heat of the battle (trading or watching markets on a 5 min chart will make you feel that you are in a battle) this type of psychological battle will continue in your mind and what most of us end up doing is walk away from the chart and do nothing and this is where again your profits gets whacked.

ESCAPE From ALCATRAZ Prison

To escape from this mental prison, I have changed my trading plan a little bit. I have incorporated a first target in my trading plan.

Some people say: Why have the first profit target at all? Why not just raise your initial stop and ride the trend that way?  The answer is because if the stock gaps against you, then you've lost all your profits, which could be psychologically raping you.

But if you took some off the table at a logical first profit target, even if the stock gaps a bit against you, you're still likely to walk away with decent profits.

The basis of my plan is to keep yourself psychologically sound and balanced at all times and not fight yourself or cuss yourself or markets because Markets will do whatever they want to do..

I have defined first target in two ways:

1) Using the previous range.. and adding that to the breakout price

2) Using 2.5 times the Average true range.

If I get either one of the above move, I take 1/2 position off and keep the other half for my Caribeean dream and move my stops on the remaining half moved to break even prices.