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How to Protect and Keep Your Confidence Trading

March 21, 2013

When a SWAT team rushes to rescue a hostage, its members arm themselves with more than weapons and flak jackets. In an emergency room, the trauma surgeon calls upon more than his training and medical instruments. And a high-wire artist needs an edge beyond superb balance to perform aerial feats. These professionals must possess absolute self-confidence in order to make the high-stakes, split-second decisions required of their work. The same holds true for stock trading.

The stock market places traders under the constant pressure of fast decision-making. To be successful, you must maintain your nerve at all times. The market demands no less than lightning action. Losing your nerve will lead to second-guessing, indecision and ultimately losses and lost opportunities.

I've seen this happen. An investor's confidence is shaken by a big loss in a stock or by a losing streak. As the next opportunities set-up, instead of buying aggressively, he hesitates or doesn't act at all. So he misses out when the new leaders rally. Now resolved not to miss out again, he aggressively buys the next group of stocks. But those stocks are laggards. He's already missed out on the new market leaders. I call this "zag zigging"; when you zig when you should zag and vice versa.

Some people wrongly think that confidence is something innate. Either you have it or you don't. But this is not true. You should practice several strategies to actively build and protect your nerve:


HONOR THY STOP -The best strategy happens to be flawless execution of your loss-stopping rules. Big losses can damage your psyche just as badly as your pocketbook. By cutting losses short, you avoid the psychological as well as financial damage of a big loss. You also reinforce your belief that you are in control of your portfolio, not the impersonal forces of the market.


MAINTAIN PERSPECTIVE - Realize that it's normal for even the soundest trading system to suffer losing streaks and phases of underperformance. This is not an excuse for complacency. While you should conduct post-mortems of your losses and learn from them, you should not obsess over them. But bear in mind that all investing styles go through favorable and unfavorable cycles.


MENTAL REHEARSAL - Before Jack Nicklaus would ever move a muscle to tee off, golf's greatest champion played through every step in his mind. He visualized how he would step to the tee, his swing, the ball flight through the air and its landing in the exact spot desired.


I mentally rehearse the day's trades prior to the open.  I think through how I'll handle each situation. If a position is teetering on a loss, I decide in advance if I’m going to scale out gradually or blow out the entire holding at one price. If I want to nail down a profit, I envision the trade to come if the market rallies in the morning, or how I will react if it suddenly drops.

Before the opening bell, I've seen the possible outcomes and reviewed the contingency plans. This kind of mental rehearsal saves me from the greatest fear of all - fear of the unknown. When an event occurs, I feel as if I've already experienced it.


Mark Minervini

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