Stock Trading Tug-of-War between Emotions and Technical Analysis

RIMM (Research in Motion on the Nasdaq) had a Ctabs sell action on February 11, 2009. As of March 3, 2009, RIMM had a Ctabs buy commentary. In the period from February 11 to March 3, according to Ctabs candlestick technical analysis, there were a number of candlestick signals for a buy action if the closing price on the next trading day confirms the buy signal.

The choice of RIMM is purely for illustrative purposes only. Any stock could have been chosen to make the points that follow.

So, following the trend using a good technical analysis system would keep the trader in good standing to reap profits from the momentum that is building which appears to be forming an up-trend in RIMM as of March 4 where March 3 in hindsight represents the trend reversal from down to up.

Now, a trader in contact with me said she is selling her RIMM position on the strength of today’s rise (March 4) because it brings the position to be slightly positive. She had apparently bought RIMM a few days ago and had seen her stock position in negative territory. I recall doing the same thing before I started relying on a good technical analysis system that can show me the trends.

This is a good lesson and point of observation. If a trader enters into a position without the guidance of trend indication, then it is understandable that the position may enter into negative territory. Then on a good day such as today (March 4) and yesterday, where there is building momentum for the stock, the trader takes the first opportunity to get out of the position because it relieves the pain (emotions) of the paper loss in prior days.

I would not necessarily say this is a wrong move because it goes to the risk-reward assessment. If the trader is feeling uncomfortable (emotions tugging at the senses), then the trader may conclude that the reward is not worth the risk, hence get out of the stock position.

Well, okay, that was an acceptable decision. But now what? Do you stop trading RIMM altogether? Do you trade another stock? Unless you stop trading altogether, you will be confronted with the exact same question time and time again. Where do you buy to enter a position? Where do you sell to exit a position?

My provoking comment to my contact was “If Ctabs has a buy action on RIMM today because it confirmed the buy signal of yesterday, then you must go with the technical analysis guidance and be in the stock, not out. Why would you sell the stock today?”. Her answer was “I don’t know.”.

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