Originally published by Chamber of Merchants
Note: This is the conversation I have with myself when the stops get run on my holdings, in this example I use Blackham Resources Ltd (AX:BLK) because its relevant today.
My holdings are always in companies that I am confident will appreciate into the quarter. This post discusses my thought process during a run on stops, when I am confident that the overall trend is up.
On the other hand, when there is a share that I need to cut then I do that. (looking back I have cut my losses by approximately 5k AUD by exiting that little trade that turned on me. It’s dropped by another 35% since my exit. Dodged a bullet by thinking clearly).
But until then, it’s case of mind over matter.
On a day like today when the share prices are lower than we would like, we should Think More and Feel Less.
Why do you feel fearful?
Generally, I feel fearful when I feel out of control. This means something unexpected is happening and I don’t know how to process the information. I start eyeing the sell button as a means to end my discomfort.
Solution: Has my original thesis changed? Has the global environment changed in such a way that my sector will no longer be profitable or desirable.
No, everything is still the same. In fact the when I look at the depth on the my share that’s being raided, it shows that retail traders just like me are panicking and sending the stock lower to try and save their trades.
Think back. Ah yes. That’s how a dragonfly doji candle is created. Sellers panic, selling for a price that is too low. Then buyers snap the shares up sending the price back up.
Stop losses are notorious for “accidentally” selling traders out, only to have the price go back up and leave the trader behind to re-enter at a higher price.
Dragonfly Doji
Additionally, what’s the bigger picture? Do we have a major political event coming up?
Yes. Do we have economic events on the horizon that may be good for us? Yes.
Is there any bad news on the particular share or industry? No.
Then why are you fearful? You are fearful because the price is triggering you to imagine a horrible, horrible future full of regret. Is this price lower now than it was before?
No. In fact it was lower just a few days ago. The lowest of today is actually not as low as the previous low. This probably means the share price has good support around this area.
What’s the volume like? Major Sell-off?
No. In fact the price is low on very low volume relative to other days. This means that larger investors are not exiting. It is most likely small retail traders that panicked early in the day. If you sold now, how easy would it be to buy back your shares? I use Blackham Resources as an example:
BLK.AX Blackham Resources
If I were to sell 150,000 shares I would be selling out at 71.5c,71c and 70.5c. However, if someone, on the other side of the fence has been waiting to enter this share at a low price then I would be handing them a 150k shares which they would not be able to purchase otherwise at such low prices. In the above example, if I wanted to buy 150k shares then I would end up paying more than 75c!
So while I panic and sell, I would set myself up for even a greater loss when I realise that no one else is really selling, hence the low volume. In addition, If I know that this share is going to be worth more in the future, I would want to accumulate at at the lowest price possible.
In fact, if I already have, say 500,000 shares, I could easily sell a small portion of my shares to force the price down on low volume, then repurchase the shares I sold as well as the shares that you’re giving me.
Any stop losses you have would come in handy too, since I would trigger them and they would help me achieve my lower entry.
Once again, if the company or share’s future is in doubt then this article does not apply. Rather refer to my loss cutting article.
Conclusion
The brain is designed to react to fear. Fear keeps you alive when a lion is chasing you down the African Savannah.
( Or the passageways of a neglected zoo.)
Fear keeps you alive, yes.
But fear does not facilitate logical thinking or rational reasoning. It wants to save you from discomfort.
Fear is there to make you change something.
So take Fear’s hint and change something. Change your way of thinking.
Get comfortable being uncomfortable.
Trade the Big Picture and move into a higher level of thinking. Why do you know so few people that trade stocks and actually make money doing it? That’s because few people can withstand the pressures of the low and the excitement of the high.
Think More, Feel Less. Trade Better.
| the Merchant