July 21, 2011- Treating my Insanity

Albert Einstein once said that “Insanity is doing the same thing over and over again, and expecting different results.”

For a few years now, I’ve been trading the markets utilizing technical analysis as my primary tool, trading high probability patterns that advance about 30-50% in a few months time.  I seem to have identified the stocks that are trending up correctly, but my portfolio didn’t advance 30-50% or at least half 15-25%.  I must be doing something wrong right?

Often times, I’ve blamed the market for my trading results.  It’s quite egotistical of me and as Albert Einstein puts it – insane of me, not to think that the reason I’m getting the same results – which is nowhere land- can partly be attributed to my own trading.

Too often, traders manifest the problem of selling all their positions at once, and never being able to buy the stock back again, foregoing 10-20% gains in the process.  Mentally, it becomes harder and harder to buy a stock that has moved 10% away from our selling price, only to see them trend further up, leaving the trader behind in the move.  Mr. Simple Buy and Hold or Mr Blind Tsismis Buyer then snickers a laugh at Mr. Complicated Trader for being left out, when the simple moving averages could have just allowed Mr. Complicated Trader to ride the trend fully.

So why do we complicate our lives?  Is it that we have too much time, that we have to trade in and out of our stocks?  Why do we love paying commissions?  Is it that we are just simply impatient with the corrective pauses?  Perhaps Mr. Complicated Trader could just tweak his style by selling half or a third of his holdings, with the intention to buy the other half or the other third back, once the trend resumes again.  That way, he minimizes selling too early, and maximizes his cash to other profitable endeavors, while managing to keep some profits too.

The technical guides to trading in stocks are by no means infallible.  The more experience one gains in their use, the more alive one becomes to their pitfalls and their failures.  This is just my personal treatment to my own selling insanity.

In my years of trading the markets, I must say that charts can defy gravity and any other notion that man can conceive of.

Let me leave with Mr. Edwards and Magee’s definition of what chart formations are:

“Charts are the inerasable fingerprints of human nature made graphic in the greatest struggle, next to war, in human experience.”

They are depiction of multifarious human actions bearing on a single variable (price).  On price converge a galaxy of influences: fear, greed, desire, cunning, malice, deceit, naivete, earnings estimates, broker need for income, gullibility, professional money managers’ need for performance and job security, supply and demand of stocks, monetary liquidity and money flow, self destructiveness, passivity, trap setting, manipulation, blind arrogance, conspiracy and fraud and double dealing, phases of the moon and sun spots, economic cycles and beliefs about them, public mood, and the indomitable human need to be right.

– Edwards and Magee (Technical Analysis of Stock Trends, 9th Edition)

-The Faceless Trader

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