Anyone can make money in a bull market, but keeping it, that’s the real challenge when things turn bearish.
I find that the masses are influenced by market myths rather than facts. Most say they want to hear facts, but when confronted with something new, instead of embracing it, they hang on to an old mindset believing they are right to follow the herd. Ultimately, they end up losing. Why do people do this? Simply, it’s fear of loss and being wrong.
We’ve all heard Buffett’s quote “buy in doom and sell in boom”, yet how many traders actually do this? The experienced are looking for opportunities and wait for their rules to trigger when the herd is negative, but so many get caught up in the fear campaign, or a get rich quick mentality. To think differently would go against an instinct to follow the herd.
Remember, the two emotional vehicles driving the market are greed and fear, and neither are good when looking to profit. Greed dominates the emotional landscape in the boom, lulling traders into a false sense of their ability. Fear takes hold in doom, leading to poor decisions, or none at all.
Being successful in the market is not about how much money you make, it’s about how much you don’t lose. This means being able to sell and follow your rules. A prime example of where a trader fails to recognise fear and greed is when a short term trade turns into a long term “buy and hold”. Perhaps you have some of these trades in your portfolio now! You wouldn’t be the first trader and you won’t be the last to do this.
Let’s look at an example a trader once shared with me. Unfortunately, he waited to examine the trade after it had turned into a big loss. However, better to act than do nothing. There lies a valuable lesson in every trade, particularly those where you either didn’t properly execute your rules or you hung on hoping you would eventually be right. But few traders actually take the time to review these trades, which is a shame, as they hold the key to a strategy you can put in place to eliminate a repeat occurrence.
The stock the trader purchased was Telstra (TLS), which has over recent months fallen quite heavily. Recent news that rival TPG Telecom (TPM) intends to build a $2 billion mobile network saw TLS shares take a further dive.
The trader purchased TLS shares in December 2016 for $5.89. The term he set for the trade was medium to long term in order to generate capital growth and income from the trade. Initially, the shares rose by around 14%. Following the high of $6.74 in January 2015, TLS began its decline. The first significant drop wiped out around half of the gains. Exit rules were triggered weeks later, however, the trader admitted that he was holding out for more.
Janine Cox Is A Senior Investment Analyst at Wealth Within