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Educational Article

Lessons Learned

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Lessons Learned
By: Lee Lowell

Nobody needs to hear anymore how bad it was on Wall Street last week. We've just gone through one of the harshest weeks on record. Did you have your money management plan at work, or did you let greed, your ego, and hope take over? When we first learn about the markets and how to trade, you always hear of that one rule about preserving cash and taking profits from time to time. That rule has never hit home more than it did last week. All those profits built up from November 1999 to March 2000 have just about vanished for many people. I know I have given away a nice chunk of change. It hurts bad! You never think that it will happen to you. That only happens to the other guy. Well, guess what? No matter how hard you've researched your picks, and how good you think the company may be, most likely you lost some money too. Kudos to all those great investors who sold out of all their positions two weeks ago. Do you know anyone who did?

As an active stock and commodity trader, most of my positions are short-term. My option trades usually never last more than two months. I do own some stocks for the long haul and some leaps options, but 95% of the trades I make are to get in and out relatively quickly. But nevertheless, all my stocks and long call options took it on the chin last week. Anyone who has traded for awhile has success and failure stories. But the ones who have more success stories are the ones who have a good money management plan. There's nothing wrong with taking a profit. Ever! No matter how small it may be, a profit is a profit. I know I saw too many of my profits dwindle last week. Setting stop-loss orders is a great way to automatically lock in a profit or keep a loss to a minimum. Use it! You'll be happy you did, especially after you've seen how much money you could've saved after last week's meltdown. You can always buy back in after the fall.

After last week, many people probably had to re-assess their career choice. I know I always do after a bad spell. Trading for a living is a tough job. The stress level is about as high as you can get for any career. And the stakes are just as high. Are you playing with your retirement money or your kid's college money? Are you able to keep a clear mind in times like these? Do you have nerves of steel? Before you get into a career of trading, you need to assess your own ability to handle these kinds of pressures. Also, how well you do in the market is totally black and white. You either make money or you lose money. You're either up or down. You're either happy or sad. There's no in-between. You're not providing a service for anyone, you're not creating a product, nor are you adding any immediate benefit to the economy. You're out there for yourself to make money.

Most people don't realize the psychological effect trading can have on a person. When the bottom line is whether you made money or not, it can be a great burden on someone's psyche. You're totally judged on how well you've done in the market and how much moolah is in your bank account. There's no great feeling of teamwork or comradery when you trade. Or that feeling of satisfaction you've gotten after helping build the only functioning hospital in a third world country. It's every man for him/herself. The mood swings can be so erratic. You're incredibly happy and feel invincible when you make money, but you feel like the biggest loser when the trades go sour. While I was in the midst of being a floor trader some years back, there was a study that said the average burnout rate for a floor trader was five years. I made it to five years, three months. Woohoo! It's as much a physically demanding job as it is mentally. It's also why the average age of the floor trader is usually under 35. It's hard standing on your feet for 6-7 hours a day, every day. Getting pushed, shoved, elbowed, spit on. It ain't pretty. I've since moved my trading operation to my home where I can focus on the mental part of the game. The physical aspect is no longer needed. And I don't have to shower if I don't want to.

Getting back to the greed, ego and hope thing. These are the three most important psychological obstacles to overcome if you want to be successful in the markets. Greed is what keeps you in the market for that extra eighth of a point on your stock/option. Your ego is what keeps you from selling your stock/option when you don't want to admit defeat and take a loss. And hope is what you do after you've realized that greed and ego have taken most of your money away. It's very hard to admit that you made a losing trade. It's against human nature to want to be a loser. We should fight as hard as we can and not give up. Unfortunately, that fighter mentality can cause big losses in the market. You can't single-handedly stand in front of the big bad bear train. Once again, the successful traders are the ones who can keep their greed and ego in check. If the trade goes against them and hits their stop-loss, then they're out and on to the next trade. Don't fall in love with your picks and don't "hope" the market higher. It doesn't work. We've all tried it.

This sounds like an advertisement to stay away from trading altogether. Not at all. It's just a primer to help you be aware of what it takes to become a successful trader. It's always easier said than done. But that's where experience and the "school of hard knocks" will help in the long run. Before you jump into the trading waters, make sure you've read some basic investment books, spent some time on financial websites, talk to others who've invested for awhile, know your own temperament, and don't quit your other job just yet. Don't be afraid to take some money off the table. Even long-term investors/buy-and-holders should take profits every once in awhile. I wish I had recently. But don't discount the great buying opportunities that can arise after free falls like last week. Just when it seems the darkest, that is sometimes the best time to buy back in (if you have some spare cash). Don't get me wrong, I love trading for a living, but sometimes it takes a big move like last week for you to re-read all the money management rules. I wouldn't give up this profession for anything else. (o.k., maybe to become a pro baseball player. What man wouldn't?).

Good luck and be ready for the next buying opportunities.

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