This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
I have had a lot of bad trades in my career. The ones that stand out do not linger in my mind due to the dollar figure I lost, but they have more to do with how I let my emotions get the better of me. A trader can get so caught up in the moment that they feel like a stock “owes” them money. As a rational person, it is tough to admit when you act irrationally. After taking a few small hits on a stock, the sensible thing to do is to move on to something else and find another trading idea to start working on. That is not what always occurs. A trader can get tunnel vision when he or she becomes determined to make money on a particular stock. This happens for two reasons. The first is when things get personal with another trading firm. When a trading order is booked, it is assigned a number corresponding to the trading house that has placed the order and all traders get to see this information. There are over of these 200 numbers on the TSX. When a trader starts to have problems on a particular stock, they can start to attribute those problems to one particular firm number. When a trader starts to lose money it can truly feel like a personal attack from a certain firm. The trader stops being objective and becomes too focused on what the other firm is doing.
The second reason tunnel vision can happen is when the trader becomes too focused on just one stock. It is a double-edged sword because when a trader is making money on one stock, getting really zoned into it can be positive and profitable. It becomes very bad when the particular stock becomes a money sieve for the trader. The trader is losing money but they just can’t seem to stop trading that stock. In an odd way it almost becomes personal as the trader starts to view the stock as something that is taking their money away. The only way to end the problems and the losses is to take the stock off of his or her trading screen for a day, a week, or even longer.
The bigger your bias to one side or one stock, the harder it is to make money. A trader with a strong bias on daily and weekly moves is generally not looking for ideas; they are looking for news items and information to justify their own beliefs. They start to miss other market signals, other stocks that are moving and can often stop seeing the market shifts in general.
This can happen to investors just as easily. The problem with average at home investors is that they often do not realize mistakes and biases as early as a trader. Most experienced traders who get tunnel vision stare at their trading records at the end of a really bad trading day knowing full well what happened. I have spoken to investors who are holding losing investments and losing trades well past the mistake and they are still convinced they “did the right thing” all the way through the process. If you cannot recall a trading or investing mistake you have made, you are probably in the most trouble because you are not able to even recognize the problem. Having a losing trade or a losing investment happens to everyone. How they are managed and dealt with is what separates good investors and traders from bad ones.