Whether you are a beginning trader just starting to get the feel for the business and making your first trade, or an experienced pro unfazed by anything the market throws at you, chances are that you are still susceptible to the emotional highs and lows of your day to day or month to month trading matters.
It is probably ok to have those emotional high’s and lows hit your brain when you have positions in the markets. But just be sure that your experience and overall knowledge and discipline is strong enough to override any possible emotional or euphoric effects of a great trade (or a bad losing trade).
You know, I can tell you one thing that happened to me already several times many years ago ( I believe it was 1998). I was fortunate enough to have predicted that sharp decline with a decent amount of precision. Don’t ask me why but I chose to pick on Cisco Systems (CSCO) with a put option. Cisco was one of the strongest stocks at the time and really was not one to fall apart in a big way… until the Asian currency crisis happened. Cisco was one of the last stocks to break down during that market correction.
So anyway, as I was saying, I had a put option that was significantly out of the money and when Cisco finally broke, the volatility spiked and it got very close to being in the money. I had an enormous paper profit.
So what did I do?
I let it get to my head (the euphoria I mean).
I let my position keep running and did not close the trade. And during one of those nights I went to a luxury car dealership lusting over all the brand new shiny BMWs and Land Rovers. I drove around that dealership and felt like I was on top of the world. It was like a drug fix. But it was a big mistake.
My position was still open! and it was an option position!
Options positions are meant to be closed and closed quick with any sort of decent profit. Even if it is a long term leap option, it should be closed if it has a generous profit.
But I was euphoric, and blinded.
Running around luxury car dealerships or telling your friends and family members about all the things you are going to buy them and yourself is a very very bad mistake if your position is still open. DON”T DO IT. Trust me. It will get you into trouble and it will blind you. CLOSE your position and walk away for a few days or a week if necessary and then celebrate all you want or brag all you want. But DON’T do this if your position is still open.
Be a professional and don’t let your trading matters to get to your head.
My Father, champagne, and classical music
My Father was also guilty of letting his trading get to his head. In his case the trade was also an option position. It was a call option on Apple Computer way back when… I cannot remember the specific date. But it was a great great trade. I forget how much he committed to the trade at the start, perhaps around $5000.
As I try to recall exactly how this trade was setup… I believe Apple Computer (AAPL) at the time had nearly completed a pretty rough corrective period after a messy basing pattern. The stock was oversold and there were some good signs of volume coming into the stock. The oscillators were saying buy and the risk reward was pretty good. So my Dad had a call option on the stock. Two or three days later, there was a big press release and announcement by Bill Gates that Microsoft would continue to support and produce the Microsoft Office line of products for the Apple operating system. I think this is what the announcement was. It was so long ago that I cannot exactly recall what the big announcement was, but it was a major headliner and a vote of confidence in Apple’s business which was floundering at the time.
To make a long story short, my Dad’s account on paper was near $25,000. Needless to say he was euphoric about it and it got to his head.
So what did he do?
He invited me and my Mother out to an outdoor classic music concert that was happening that night (Beethoven). But his call option position was still open!
We sat there on the lawn, listened to that mesmerizing music and drank champagne and giggle and laughed about what a great trade he had made…
But he did not close the trade yet!
So the next day the trade turned around on him. And rightly so because the 3 or 4 day upmove was a vertical spike, and vertical spikes always do retracements because they are unsustainable in most cases.
So he ended up with still an average profit, but no where near the blowout profit he could have had, had he not let the euphoria get to his head.
No one is perfect. These types of mistakes happen to everyone surely. The key is to do your best to minimize the euphoric damage so that you can maximize your profits.
Peace!
I’m out.