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- Understanding Your Trading <b>Psychology</b>: Let's Take Control! Part 4
- You, the Scientist! Personal Construct <b>Psychology</b>
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| Understanding Your Trading <b>Psychology</b>: Let's Take Control! Part 4 Posted: 09 Apr 2010 07:49 AM PDT Welcome to Part 4 of my series of articles on Trading Psychology. In this chapter we will be looking more specifically into Options trading and our psychology when looking at the risk graph. The risk graph can be a very deceiving chart to look at sometimes. Our greedy and fearful minds can sometimes let us see only what we want to see. Let's take a couple of examples. In Chart 1 we will look at the risk graph of a Long Call on Apple (AAPL). Chart 1
(Click here to enlarge) Looking at this risk graph, what are the two attributes that probably grab your attention up front? One might be the very small entry debit of $156, but the main one is probably the unlimited profit. Our eyes scan up to the $300 price level on the stock chart, then across to the risk graph, and we say to ourselves, "If Apple went up to $300 in price, I'd be making about $3000!"(To see this on the risk graph, look up the vertical axis on the right to the $300 price mark - this is Apple's stock price - and then look across to the left to where the red line on the risk graph intersects that $300 mark. Then see where this point meets the horizontal profit access - approximately $3000). Our eyes (or really our greedy minds) can get sucked in to thinking that AAPL will make it to $300. Why? Perhaps it's just because we think it can, or simply because we're looking at a Long Call risk graph, or just because the risk graph looks so attractive and enticing? These aren't very good reasons to take a trade, though. Any stock could go anywhere, so yes theoretically it could get up there, but most of our supposed view on Apple here making it to $300 is probably just because the risk graph looks so attractive. Do we actually think AAPL will go that high? What does our technical analysis really tell us? Have we even considered time frame? This is a 51-day trade. Sure there may be a day when AAPL is at $300 a share, but our option trade here only has a 51-day life and then it's game over. Let's sit on this thought for a while and look at things from a different angle. Chart 2 is a short Call spread on AAPL, (a Call credit spread). Let's pretend for a second that we placed this trade a couple of weeks ago, and since then (looking at the stock chart), AAPL has made about $10 move up. (Naturally we would probably be in some loss here but for the exercise we don't need to worry about the numbers.) For you to initially place this trade, your view may have been that AAPL will find resistance around the $230 mark and you were comfortable with selling a Call spread 30 points OTM, but since then the stock has blasted through $230. If this was your trade, what do you think your view on AAPL would be now?
For most traders, I can tell you, you would probably come up with every justification you could think of for why AAPL would not go past the $260 price level (our short strike in the Credit spread) in the time frame of the trade.
Interesting isn't it how our view on a stock can change, depending on what type of trade we have on. Weren't we thinking just a minute ago that AAPL will make it up to $300? Why do you think we as humans come up with all these excuses and justifications? There are lots of reasons, one of the main ones being that we don't want to be wrong - we don't want to have a losing trade and find it hard to press the button to close a losing trade. But the reason we are fearful in the first place is because we're not embracing the 'risk.' This is our fear coming out; we fear risk. Our psyche doesn't want to look at that area above the $260 mark. The thought of the stock being up at $300 with this risk graph makes us feel sick on the stomach. Imagine the loss of money up there, imagine being so wrong, imagine telling our friends or family about this trade, imagine the dent in the trading account it would make, imagine the pain of knowing we could have closed the trade when the stock was at $250, but we let it run up to $300! It's just unimaginable all the pain and fear that exists up in that area of the risk graph" unless you know how to deal with it. Risk is the most important part of the trade. You need to view risk a new way. Make it your friend and embrace it. Don't block it out, it is real and needs your TLC! Embracing the risk means accepting the consequences of your trade with out any fear or emotions. To accept the consequences of the trade, though, firstly we need to believe that anything can happen in the market - no matter how good a set up or how probable a trade is. Secondly we need to give up the need to be right. We need to think about the markets in a way that being wrong or losing money doesn't cause us mental anguish. If you put on a trade and are afraid of the risk or the worst possible consequences, then your fear will probably act on you and cause you to create the very scenario you're trying to avoid the most - a losing trade! When you let go your expectations of the market, then you can't have any disappointment. An upset can sometimes just be an unfulfilled expectation. If you weren't expecting anything from the market, then if the market goes against you there won't be any emotional involvement. You 'expect' the market to do anything. As much as you set up the trade with as much probability on your side, once it's placed it's just you and the market - don't expect anything! If you don't expect or hope, then you can't be disappointed if it goes against you. We don't even want emotional involvement if we're right! Getting too excited (and greedy) can make it hard to close the trade, we want more, and are fearful actually of leaving money on the table. For some people that can be as gut wrenching as losing money; getting out for a little profit but then watching the stock continue to make a whole lot more. If you are set on being right in a trade, or determined not to lose, or are afraid of leaving money on the table, then you will probably find it hard to get out of the trade. If it goes against you, you will insist on it returning because you don't want to be wrong, then possibly end up closing it for a lot more loss than originally. If it goes in your favour and you are afraid of leaving money on the table, then you will probably find it hard to push the 'exit' button, thereby possibly waiting until the stock starts to retrace and go into loss before it all becomes too hard and you close the trade. So work on this within yourself. Try to let go the need to be right and the need not to lose. Let go of any expectations you have of the market making one move or another. Yes, set yourself up into a trade with the most probability on your side you can get, but then believe that the market can do anything. If you weren't believing it to do a specific thing, then you won't be disappointed if it doesn't. You can then let your trade plan play itself out, as it won't have 'you' and your bundle of emotions involved.
Matt Baker
. For more information on learning how to make money with options, go to the Optionetics.com full site! We empower investors through knowledge.
Five Filters featured article: Chilcot Inquiry. Available tools: PDF Newspaper, Full Text RSS, Term Extraction. |
| You, the Scientist! Personal Construct <b>Psychology</b> Posted: 09 Apr 2010 06:19 AM PDT GuestsBill Warren David Winter Further InformationAll in the Mind blog with Natasha Mitchell - a place for your comments and discussion Brotherton Lecture 2009 - Professor David Winter "Shaking Hands with a Serial Killer" Australasian Personal Construct Group Personal Construct Psychology - member group, Australian Psychological Society (APS) X Biennial Congress Of European Personal Construct Association, 2010 Publications
Title: A credulous approach to serial killing - article
Title: Philosophical Dimensions of Personal Construct Psychology
Title: Personal Construct Psychology in Clinical Practice: Theory, Research and Applications
Title: Constructivism in Psychology: Personal Construct Psychology, Radical Constructivism, and Social Constructionism
Title: Personal Construct Psychotherapy: Advances in Theory, Practice and Research
Title: Personal construct psychology: The first half-century
Title: The effectiveness of personal construct psychotherapy in clinical practice: A systematic review and meta-analysis
Title: Personal Construct Theory and General Trends in Contemporary Philosophy.
Title: Personal Construct Theory as the Ground for a Rapprochement Between Psychology and Philosophy in Education.
Title: Personal Construct Theory and the Aristotelian and Galileian Modes of Thought.
Title: Psychoanalysis and Personal Construct Theory: An Exploration.
Title: Is Personal Construct Psychology a Cognitive Psychology?
Title: The Elaboration of Personal Construct Psychology
Title: Construing the Construction Processes of Serial Killers and Other Violent Offenders: 1. The Analysis of Narratives
Title: Construing The Construction Processes Of Serial Killers And Other Violent Offenders: 2. The Limits Of Credulity PresenterNatasha Mitchell ProducerNatasha Mitchell/Anita Barraud Five Filters featured article: Chilcot Inquiry. Available tools: PDF Newspaper, Full Text RSS, Term Extraction. |
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