Trading Without Emotion
Peter Forth
StockReflex stock
market replay simulator
Apr 14, 2008
Last autumn 4th Systems announced
the launch of StockReflex, an online edu-game that lets users
sharpen their trading skills by quickly scrolling through years
of historical stock charts. With $100K of virtual money to play
with, users make buy and sell decisions based on chart activity
and get an instant and authentic read on how these trades would
have actually played out.
"StockReflex's swift pace
and competitive scoring makes it play like a fun video game,
but legitimate learning is gleaned through the process,"
says Peter Forth, CEO of 4th Systems. "Every time you play
StockReflex you get better at playing the real market."
StockReflex - a timely tool
for traders of all levels of experience - allows users to practice
trading without a cloud of fear or greed influencing decisions.
StockReflex sells for $99.95
and lets users trade thousands of stocks from across the market
spectrum. Users can pick a particular stock or let the system
select a mystery stock for them.
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Research indicates
[pdf] that more than eight out of ten people who trade
the stock market on a regular basis lose money. However, the
people who do make money at trading tend to do so consistently
and repetitively. What do these successful traders have that
the others don't? A key factor is their ability to make their
decisions to buy and sell without being influenced by extremes
of fear and greed. Indeed, inappropriate emotional influence
on trading decisions is one of the key reasons that most traders
fail to make a profit.
Fear
There's a martial arts
maxim that you should never get into the ring until you have
mastered the basic forms. If you do, your fear of getting hurt
makes it almost impossible for you to objectively evaluate the
situation and respond to it appropriately. So how does mastery
of the basics stop you from being fearful? Most fear stems from
being confronted with an unfamiliar situation and being unsure
what the correct response is. By practicing and rehearsing situations,
scenarios and responses beforehand you can recognize them when
you confront them in real life. Ideally you will have already
tried solving the problem using several different tactics while
in the safe zone of your training and should now have no hesitation
in choosing the most appropriate and effective response.
This same principle applies
to trading. How many times have you seen a stock you own spiral
downward and thought, "Look how far it's dropped! I'd better
get out now before it falls further and I lose all my
money". Or if a stock you were considering purchasing goes
up before you bought it and said to yourself, "I'd better
jump in now or I'll miss the boat completely!" With enough
practice and experience under your belt you would be less likely
to be scared into making the wrong decision.
Greed
The flip side to fear
is greed. Wall Street's Gordon Gecko may have preached "greed
is good" but this is not necessarily true in stock
trading. For example, greed can cause you to stay in a stock
too long and watch the profits that you had acquired evaporate.
It can cause you to misallocate your capital by putting too much
money in a stock that has performed well for you in the past
instead of properly diversifying your portfolio. And perhaps
even more seriously, as Bears Stern's employees recently found
out, it can encourage you to use too much leverage. Anyone who
has tried this can attest that leverage is a double-edged sword.
It can produce spectacular gains, but many investors who start
out successfully become overly confident and begin to use more
and more of it. Once this cycle begins, it's only a matter of
time until the inevitable highly leveraged bad bet decimates
the gains which have come before it.
Practice, Practice, Practice
Just like you shouldn't
practice your basic martial arts forms in the ring where your
mind is more focused on pain avoidance then executing the tactic
correctly, a novice shouldn't begin trading with real money and
real consequences. Only once you've amassed significant practice
in a safe environment where you can conduct your technical and
fundamental analysis without being emotionally distracted should
you begin to trade with real money. And when you finally start,
don't jump straight into the ring with Bruce Lee. Begin tentatively,
gradually, slowly increasing your trading exposure over time
as you become accustomed to the increasing levels of risk. How
do you know you've moved too far, too fast? If you are finding
it's becoming harder to sleep at night, either because you are
worrying about your trades or you are excited about your gains,
then you have moved into the realm where your emotions are going
to have too strong an effect. You are going to start making poor,
emotionally-clouded decisions and so it is time to scale back.
Real-time Virtual or Fantasy Trading
There are hundreds
of online systems that allow you to practice trading against
the real markets using virtual money. These systems are useful
in that they provide an automated way for you to keep score and
track your trading progress without risking real cash, so you
can keep your emotions in check. These systems allow you to practice
both your fundamental analysis (choosing stocks based on fundamental
market trends) and your technical analysis (trading using patterns
in a stock's chart to tell you where the best entry and exit
points are).
Replaying History
Real-time virtual trading
is an incredibly valuable place to begin practicing emotionless
trading but it does have one drawback - it has a fairly long
feedback loop for your learning curve. That is, you can only
learn as fast as the market itself moves, so sometimes you have
to wait for weeks or months before you can evaluate if your trade
was profitable or not. For traders who use stock charts and technical
analysis but want to speed up this learning curve, there is another
class of software tools called "replay engines". Instead
of using real-time data, replay engines present you with historical
stock charts that you can fast forward through at an accelerated
rate. This allows you to pick your entry and exit points and
then scroll ahead to see almost immediately if the trade worked
out. Using this approach you can potentially simulate a whole
years worth of trading in minutes.
Black Belt Trading
The market can feel
like a combat zone. It's a real challenge to keep your emotions
from obscuring your judgment and influencing your moves. However,
with the trial and error of practice and the hindsight of experience
under your belt, you can learn to approach your trading with
the calm, cool deliberation of a skilled master.
Apr 10, 2008
Peter Forth
contact Peter
Forth
website: Stock
Reflex
Peter Forth
is President
of 4th Systems Inc. and creator of the StockReflex stock
market replay simulator. You can watch the video, download a trial
version, or buy the
replay simulator here. Part video game, part learning tool, StockReflex
helps you refine your technical analysis skills and amass trading
experience without financial risk.
321gold Ltd
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