Last weekend I wrote a little article suggesting that perception, not necessarily actuality, moves the markets. In the article I quoted -- yes, quoted, not made up or voiced my opinion -- some positive facts about the economy taken from front page articles in Investors Business Daily. At first I was stunned by some of the responses which, among other things suggested that I was "smokin crack," was an elitist who "hung out with the likes of [the President], and that my head might be "screwed on backwards" if I didn't agree with the emailer's opinions. It really makes me wonder whether these people ever learned civility and manners. I have no problem with disagreements and readily confess that I am not always right. I am, however, ashamed for those who use name calling as a way to attempt to bully others into sharing their opinions. Name calling generally seems to be an emotional approach when someone disagrees but has no reasoned basis or facts to martial in support of their position. Name calling is nothing but divisive and has no power of persuasion, nor does it make any positive contribution to a dialog.
My bottom line in last weekend's article which was directed to trading was: "...if we can gauge the perception of traders, their current psychological bent, we are more likely to be able to give ourselves an edge in our trading. In general, and in the short to mid-term, it is the psychological, not necessarily the logical, that moves markets." Another way to say it is that the markets move on emotion at least in the short term.
Well, emotion is what I saw in some of the responses. One critic even chose humiliating sexual names for the President and Vice President of the United States. No matter what your political persuasion, I believe the Office of the President deserves to be treated with respect and dignity. How in the world referring to a President of the United States as slang for female genitalia moves the ball forward is beyond me from any reasoned perspective. However, these statements are clear and unequivocal examples of emotional responses triggered by that person's perception. It isn't logical, it isn't reasoned, and it isn't a fact. It is a response founded in emotion arising from a mistaken belief that I was trying to take a political stance. The attackers' positions spewed from a perception that I disagreed with their political values. I don't smoke crack, am not an elitist friend of "the likes of [the President]," and can see my face and chest at the same time in the mirror so it is probably not screwed on backward. Those are facts, but they are the direct opposite of the perception upon which the name-callers based their writings. They emoted based upon perception, and made no apparent effort to confirm that their perceptions were based on any facts.
The emotional responses in the Blog are rarely accompanied by supporting fact. They usually seem to be shouts of opinion. The same is true of emotional trading. Traders operating on emotion buy because they "like" a company and hold a stock when the price is falling because "it'll come back." I've heard more than one trader say he is hanging onto a particular falling stock because "it has been good to me." That doesn't seem to be a particularly clever way to cut losses, for example, but it is a way people's perceptions (right or wrong) control their trading. Because they may have made money in a stock before becomes the standard. "It has been good to me before." The truth is that my opinion is essentially irrelevant as to what a stock price will do. Because I think a stock will go up doesn't make it so. As a successful trader, I need something other than emotion to trigger my entries and my exits.
That is my point about the markets. They, like our name-calling friends, tend to overreact emotionally to their perceptions. It is precisely that human phenomenon of emotional reaction to market entries and exits that often results in losses for those traders. The traders who can achieve discipline and awareness of "mob" psychology are the ones who are more likely to have gained the edge and succeed.
The hot reactors are fodder for the market professionals. Trade like the emotional name-calling writers write and the pro will get their money every time. Ready, fire, aim is the emotional approach. It is fine and natural to be aware of and perhaps even defensive about one's perceptions, but, in trading, the thoughtful approach may work a lot better. By that, I mean that I would suggest a trader examine the fundamentals of a stock to be generally aware of what and how the company is doing and, in important addition, look at the reward to risk potential, and then set a specific entry and exit strategy before entering a position. Stopping the process when we perceive that it is a good company and our opinion is the stock will go up will probably not save the day. As you can see with an approach like that, our emotions may play a part but they do not control the trade.
One personal opinion that I want to share is that I believe humanity has a better chance with civility. Often the other guy, no matter what his political affiliation, has good ideas too. If we reject someone's ideas simply because they are from a different political party (or other difference), it is we who are likely to be the fool.
Emotional decision making strikes me as something similar to an angry bull charging a man with a sword; it may be what anger prompts him to do, but it isn't very smart.
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
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