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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Trading Hesitation

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Busted
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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 01/20/2017
19,827 94.85 0.5%
9,225 60.61 0.7%
658 0.48 0.1%
5,555 15.25 0.3%
2,271 7.62 0.3%
YTD
0.3%
2.0%
-0.2%
3.2%
1.5%
Tom's Targets    Overview: 01/18/2017
19,250 or 20,250 by 02/01/2017
8,800 or 9,500 by 02/01/2017
685 or 630 by 02/01/2017
5,700 or 5,400 by 02/01/2017
2,200 or 2,350 by 02/01/2017
Indus strength: None YTD
Mutt Losers: None YTD
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

 

I received an email from a beginning trader who asked, "Why can't I sell on time?" If a position went well, he would ride the wave upward and sell when he thought price had peaked. But when it dropped, he stood unmoving like a deer in headlights. I gave him the following suggestions.

  • Use stops. This is an easy one. If you place a stop loss order with your broker, you eliminate the sell decision. Just be sure to pick the right place for a stop, not too close and not too far away. If the stock moves in your direction then use a limit order at your target price. That way, when it hits your target, the order executes and takes you out automatically.
  • Use your imagination! Imagine that this is not your trade, but your mother's. What would he advise her to do? Act on your advice.
  • Pretend you're me. How would I (or your favorite professional trader) handle the same situation? Would I hesitate or just sell the dog? Whatever you answer, act on it.

Did the novice trader take my suggestions? No, and now he is down almost 50% on two more trades. Instead of swing trading them, he has switched to buy and hold, waiting and hoping for them to come back.

Trading Hesitation: Psychology

Let's take a closer look as to why traders hesitate pulling the trigger (placing a trade).

I remember reading somewhere that rats, given the choice between food and pleasure would starve themselves to feel good. Traders are no different. They may also be rats, but that's not my point. If you associate trading with losses (pain), you will be reluctant to jump into a trade. Too many wins (pleasure) and you feel as if you can't lose, so you tend to take riskier trades. The secret to successful trading is to balance the two.

Consider the trades you made last year or last week. If you followed your methodology, would you have more money or less? Instead of having big losers, if you used a stop on those trades, would you have saved more money?

If you hesitate placing a trade or enter late, then you may be letting the pain of loss color your instincts. Imagine the trade turning into the biggest winner this year. Think positively. Recognize that you will not win every time, so each loss if just the cost of doing business. If you get a trading signal, imagine acting on it and winning. Repeat creating the image of placing a trade and then winning. Doing so will help put fear in its place. It will still be there cautioning you, but it should not be a wall you cannot scale.

On the exit side, the idea is the same. When you get a signal to exit, take it. Imagine that you are cutting your loss. Imaging how you would feel if you continued to hold the stock and price were to drop in half. If this is a profitable trade, imagine that you are getting out at the very peak with price then tumbling downhill.

Think about how your portfolio will grow if you continue to execute according to plan. Then imagine how you would feel if you ignore your rules and see losses pile up.

You can also try affirmations. "I will trade according to plan." "I will use a stop on every trade." "When I get a trading signal, I will take it." Repeat your favorite mantra every day for three weeks and your subconscious will accept it as a truth. You will become happier and perhaps more successful.

Successful trading is all in your head (well, not really, but it sounds good. It helps if you know what you're doing). Solve your hesitation problems by imaging that each trade will be a winner and each losing trade will remain so small as to be insignificant.

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Trading Hesitation: Closing Position

Here is a short list of additional solutions.

  • Focus on technique. If you obeyed your trading signals or traded according to your trading plan, would you have made more money?
  • Stops, again. If you used stops on every trade, would you be more successful?
  • Think positively! Know that this trade could be the largest winner of the year, and that's only the beginning. Imagine that this trade begins a series of winning trades.
  • Cost of doing business. Each losing trade is just the cost of doing business. If losses get too large, you are out of business.
  • Imagination, again. When you get a trading signal, imagine that you act on it promptly and it turns into a winning trade. If you are in a trade, imagine holding the stock and watching it drop by half. How do you feel?
  • Affirmations. Affirmations are like medicine. Repeat three times daily, preferably after meals: "I will trade according to plan." "I will use a stop on every trade." "When I get a trading signal, I will take it."

Pulling the trigger at the right time can be as easy as that or as difficult as you want to make it.

This article was based on an idea from a "Trading Hesitation" article by Roosevelt in Technical Analysis of Stocks and Commodities magazine, September 1994.

-- Thomas Bulkowski

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. A man needs a mistress just to break the monogamy.