By: David Popper
As a practicing attorney and owner of a small firm and frequent participant in court proceedings, I often have the ability to watch attorneys and pro se litigants argue before the court. Pro se litigants are those that represent themselves before the court. Often I have found that pro se litigants focus on irrelevant information which may be emotionally satisfying but is in no way relevant to their case. In fact, more times than not, I have seen unrepresented persons argue to the judge in such a manner as to annihilate their own meritorious case and snatch defeat from the jaws of victory. Some of these unrepresented litigants are attorneys.
It is often noted that a lawyer who represents himself has a fool for a client. Why? EMOTIONS! Though emotions have a place in final arguments, they have absolutely no place in the cold calculations needed to build a winning case. Likewise, emotions have absolutely no place in the market. Professional traders will tell you that their success is best when the market is approached in an academic manner.
I have made every mistake in the book. Most of the mistakes have their roots in emotion. As a long time trader, I have learned all of the trading rules that I need to know. Lack of discipline or emotion though often caused me to violate the very rules that I understand.
Is it any wonder that the same trader that successfully paper trades may lose when there is real money on the table. Emotions can and will destroy your account. What makes a trade emotional? The answer may be different for every trader, but for me it is adopting too large a position in any one stock.
Before Jim published his article "How to Trade High Risk Internet Stocks without High Risks" I was using that strategy. At first, I adopted strike prices where the calls were well above support points and the puts were placed well below resistance. Often, the difference between the call and put strike prices on the same security were 50 to 60 points apart. At that point, I would trade only 10 call contracts and 10 put contracts. Each contract would generate a premium of approximately $5 and therefore, I had an excellent chance of earning an "easy" $10,000 with reduced risk. Money came easy. But do you know what? If $10,000 is this easy, if I narrowed the spread between the calls and puts, I could make $15 a contract instead of $5. If I doubled the number of contracts and narrowed the spread, I could earn $60,000 per month instead of $10,000 per month. I can live on $60,000 per month. What I did not count on was emotion. Options are priced appropriate to risk. With additional risk, my strike prices were attacked. I was constantly covering. My failure to place my calls and puts above and below natural resistance and support levels left me vulnerable. Every time my strike prices were attacked, I covered too quickly. The positions were closed for a minor loss.
You see, greed made me rationalize that the strike prices with high premiums were adequately protected, when they were not. Greed made me take a position which was too large for my account. Fear made me close a put position which I would otherwise keep open. Emotions turned my winning trades into losers.
Over the next several issues, I will discuss emotions in the market, their causes and perhaps a cure.