Getting Rid of the Noise in Your Trading
9:30 AM New York Time. The US equity market just opened. Orders start flying through the time and sales window. The first candlestick is forming on the 5 minute chart. You are sitting there, anxious to place a trade, with your finger on the trigger ready to grab that $50,000 position.
In the background, CNBC is on and it just so happens that they are talking about the stock you want to trade. They just mentioned an analyst upgrade, which you think explains the large green candle that just closed. You have your news source open on one of your other monitors, and you glance over to see positive news coming out from the company in pre-market. You notice that the stock is soaring higher, up about 1.5% already today.
As if this wasn't enough, you remember that your friend who works for a huge investment bank mentioned that this company was being bought by their fund managers, and he suggests that you grab some shares while you still can.
Then you get a message on Skype from your buddy that you trade with. He is bragging about how he just made a quick hundred bucks in a morning scalp on this very stock and that you should jump in and grab your couple hundred bucks out of it while it is ripping higher.
10:00 AM New York Time. The first 6 candles on the 5 minute chart have closed out and here is exactly what you see:
You noticed the strong up move we saw this morning and even saw the higher volume coming in on the last candle. You don't really even think much about your trading plan or rules--not that they are all that structured in the first place--and you go ahead and pull the trigger--you enter the trade--and your emotions now kick into full motion.
You start to perspire a bit from your hands, but still have a firm grasp on the now slippery mouse. You are sitting about 2 inches away from the very edge of your seat, hunched over your desk, with your eyes locked on to the monitor in front of you. You haven't blinked for the last 60 seconds, and when your cell phone on your desk starts to vibrate you simply push it aside. You are now in that trade that you cannot imagine going against you--after all they were just talking about this very trade on CNBC, on your online news source, with your investment adviser friend, and heck your buddy even just Skyped you about it.
You see your P&L start to jump back and forth between red and green. Price just keeps chopping a little above your entry and a little below. You become a bit nervous, after all you have about $50k sitting in this trade. But at this point in time you see no real reason to get out.
A few minutes go by, and price continues to jump up and down around your entry. Then, out of seemingly no where, price drops about 30 cents in just 2 minutes. You are now down about $150 in the trade, which isn't the end of the world...yet.
10:10 AM New York Time. You take a look at your 5 minute chart again, this time you see a big nasty red candle moving lower. You still don't panic and think to yourself that this must be a momentary pullback--after all they happen all the time. You justify staying in the trade just a bit longer, even though your stop loss was hit about 10 cents ago. Here's what you see right now:
You sit back and wait wondering whether or not you should still be in this trade, but are hopeful that this trade will work out and reverse, bringing you some much needed profits.