I have been re-reading Dr. Alexander Elder's "Come Into My Trading Room" (New
York: John Wiley & Sons, Inc., 2002). It, like his other books, is excellent
and informative and is written from the perspective of a psychiatrist/trader who
has been successful in the markets. I have mentioned Dr. Elder and his books
before because they give a different slant from many of the trading works on
the market. One of the critical elements of trading he addresses is the
psychological. Many of us have heard and mouthed the rubric that the markets
move on fear and greed, but few of us have taken the time to understand how
those emotions really work in moving stock prices. "Come Into My Trading Room"
truly adds to that knowledge.
I am convinced that the psychological is the single most important element in
successful trading. I consider myself to be primarily a technical trader who
is also aware of fundamentals. Technicals (charts), as Dr. Elder points out,
are a visual depiction of the emotions of the markets; the struggles between
the bulls and the bears and between fear and greed. They are, to my mind, like
a TV screen painted with ongoing emotion from which we can make trading
decisions.
The point of this article, however, is meant to strike a somewhat different
chord. Again, Dr. Elder's work led me to the realization that people trade for
different reasons. It seems obvious that we trade to make money, but that may
not be the real motivating factor for many. There can certainly be a "rush"
from making trades. Some traders, it seems, trade just to trade. That group is
caught up in gambling mode and, for them, it seems critically important to
trade and trade again without real regard to real liklihood of success. I once
had a student who zealously paper traded and with great success in a down
trending market. He then began to trade with real money just as the market
turned choppy. In spite of the market conditions he continued to make trade
after trade even though only few were successful. I asked him why he was doing
that and he said he had to have his money working all the time. I suggested that
was nonsense especially if he was losing.
Clearly, there are times to enter bullish trades, times to enter bearish trades,
and times to go play golf or go fishing or do something other than trade. If we
do not recognize and believe that there are times not to trade, our successes
will at least be seriously undermined by our losses if not completely outpaced
by them.
Though we emphasize that our alert services are educational and do not offer
individual financial advice, I see that free trial subscribers often leave in a
day or two after signing up if they see no trades. I suspect these folks are
the gamblers. They seek action and they want it now! Perhaps if they really
wanted to add to their trading knowledge, they would look inwardly and see why
they were so dissatisfied in a day or two when no alerts were received. They
might see that there were reasons not to trade. The markets might be in flux;
there might be upcoming news about a fed decision that undoubtedly would move
the market in a direction as yet unknown. Inaction as well as action in the
market can be important. I am trading with my own real money and I am not
going to put it at risk if I don't think I have some kind of edge. I won't
make trades in my own account unless there is some information, usually
technical, that results in a belief that I have a decent entry. Of course,
even then, I am wrong at times. Consider how often I might be wrong if I
traded just for the sake of being in a trade.
It has been said that the really successful advisory services are the ones that
put out lots and lots of trades. Successful for whom? The advisory service.
If a multitude of trades are sent out, there is constant activity and that
appeals to the gambler. Unfortunately so many are, indeed, gamblers looking for
the one big hit. Obviously that phenomenon accounts for the successess in Vegas
and Atlantic City. Again, though, the question is successes for whom? The
answer, of course is the casino owners not the vast majority of gamblers who
visit seeking action.
Good Trading!
Bill Kraft
Mr. Kraft's past articles are posted on our website for your review.
