This week’s Trading Lesson
Source: Stockscores.com Perspectives for the week ending January 14, 2013
Here is a test.
If a bat and a ball cost $1.10 together and the bat costs $1 more than the ball, how much is the ball?
Do you have your answer?
If you are like the majority of people, you will say that the ball costs $0.10. That is the wrong answer since that would make the bat cost $1.10 ($1 more than the ball) for total cost of $1.20.
The right answer is that the ball costs $0.05 and the bat $1.05 for a total of $1.10.
The reason most people answer this question wrong is not because they lack the intelligence to get it right. The problem is that we are trained to answer questions quickly and that leads us to be impulsive. Instead of thinking, we get lazy and say the first thing that comes in to our mind.
Many people trade the market the same way.
Particularly when trading a hot and fast moving stock, we are inclined to not think about the trade but instead act impulsively. We fear missing out on the opportunity and will make the trade for the wrong reasons. That is the law of upticks; people lose their ability to think when a stock is moving up quickly.
That is why it is important to right down your trading rules. Traders often scoff at this idea, a simple check list of rules seems childish and unnecessary. Yet, how often have you gone back to look at a losing trade that you did and realized that the trade did not fit your requirements?
Think this approach is only for fast moving day traders? Sadly no, even long term trades, those with lots of time to consider, can succumb to impulsive decision making.
We are emotional beings with an emotional attachment to our money. When considering a trade, it is easy to see what we want to see and act impulsively because it feels good to think about the profit potential. Having that check list of rules is good whether you are making a fast paced day trade or a long term position trade.