Topstockblog

Blogging to add value. Sharing and discussing helpful websites, money, stocks, etc.

Balancing Emotions of trading

Balancing my emotions is trading stock is one of the hardest things I personally have had to do.   Balanced emotions are necessary to make good investment or trading decisions.  As the market rallies, and I sit short in my positions that I am losing a lot of money in.  I find my self smiling writing this article.  Hardly the way I felt when I was very nervous about the long position I had a call option yesterday that I worried all night about. Wish I held on to that.  What I take away from that is that I have a negative bias on the market even if that makes me wrong.  I feel more stressed out when I have a long position in the market.  Part of me to be honest is afraid of some sort of a disaster in the world and finds it easier to see the argument for the down side in the market.  Needless to say this feeling needs to be put in check. 

Asking myself a simple question is also helpful.  Which direction would I be if I was the market maker. Is his trade accounting buys against sells   likely balanced or way out of wack.    The market maker is the one guy that can’t lose or the market would not operate.  In recent times I have seen a market that feels like it could fall apart.   Just because the markets are automated doesn’t mean the system can lose money.   So trades will usually go the opposite direction of the emotions of the average trader.   Am I acted opposite of Joe investor? or am I acting like Joe investor?  If acting as opposite Joe investor I probably should have more confidence if I have come up with the trade for good fundamental/technical tools that brought me to take a chance.  On the other hand if I am on the same side of average Joe investor.  i.e. I felt like selling when the market was down this morning becuase the bank of England held rates steady to fight inflation.   I should have felt more confident with my long position.    I should reflect to the reasons I entered the trade, realize the market should move higher because by this point in the sell off everyone is selling and the market maker can’t lose money.  The market maker needs to at least get closer to even on his buys and sells. That’s why markets peak, and bottom when everyone is buying or selling.  The market maker has the biggest advantage at this point if things go the opposite direction.  To do this he must drive the others out of their positions.   So maybe I cracked the alogorythm of the automated market maker.  Good luck balancing your emotions.   Much of the market volatility can be expected as the market maker moves the market to keep his trades balanced.  Here are five (okay eight) quick ideas I am going to try to follow.

1. Stay on the side of the market maker.  Be aware of who the buyers and sellers are in a stocks

2. Only enter the best trades.

3. Be patient.

4. Limit position sizes to an amount I am comfortable losing.

5. Review the risk reward of a trade before making it. 

6.  Use bollinger bands (moving average trading range).

7.  Be more balanced to the fact that the market is priced to all known information.   The future is unknown.    

8.  Reading other intelligent stock trading blogs (Kirk report a top blog) and books.  CNBC seems to be overly biased at times to boost television ratings.

  9.  Work hard, and continue to review my material to make good decisions

January 10, 2008 - Posted by | Stock investing links, ideas, and opinions. | , , , , , , , , , , , , ,

2 Comments »

  1. I would be interested in how you determine what side the market maker is on. They have a way of deceiving you, and their side might change every few minutes, especially after a large order comes through. It’s pretty easy to determine their position in the close if you watch the action of the tape, and the settlement price, but it’s pretty difficult to know their position any other time. Market makers don’t want to carry much excess inventory overnight, and on weekends, and they will cover their at-risk inventory with options, so they are reasonably flat.

    Jeff

    Comment by masteroftheuniverse | January 10, 2008 | Reply

  2. Hi, here is my thoughts on figuring out what side the market maker is on. I appreciate the feedback!
    In the shortest of time frames the market maker is on the other side of any trade that is placed when he can not match orders for a buyer, and seller. The computer algorithm or market maker is in charge of setting a buy, and sell price for the market regardless if there is a buyer or a seller. If someone makes a block trade larger than the size of the market you will often see the stock make a print that is outside the offered bid and ask. Well now you know someone has made a transaction for that amount of shares on the buy side if it was higher, and on the sell side if it was lower. The market maker has made a deal to take on a larger transaction at slight discount or premium to the market.

    A successful openings only strategy I learned from Bright Trading is buying or selling major stocks on the New York stock exchange when a stock gaps open outside of a normal trading range. You could use this strategy on any market; but, Bright felt the other markets were two unpredictable. Say MER gaps opens 5% higher tomorrow in the morning you could short the stock, and have a trade with a positive expectation. In theory going on the side of the market maker (the specialist as they call it). If it gapped lower they would go long the stock looking to exit the trade with in thirty minutes to gain a small amount of money. In theory the market maker has alot more buys than sells at the open on a gap higher so naturally it is in the market makers interest if those people leave the trade with a loss, and if he has other people taking the other side of the trade. So routinley the stock will trend back towards the mean at least for a quick time to exit with a profit.

    At the bottom or top of any market their are lots of sellers (at the bottom) and lots of buyers (at the top) so the market maker is taking the other side of the market and it is in his interest when things get to an extream in any time frame to go the other way of trader psychology.

    Comment by topstockblog | January 13, 2008 | Reply


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