My Psychological Trading Hurdles (3) – Uncertainty

By Kenneth Robson on July 10, 2012 • ( 0 )

Our master trader is confident and decisive. He is single minded in his focus on a trade; and possesses a ruthless touch when it comes to closing out losing positions.

Nice” competitors, it is said, finish last. I think I must be one of them. I have well thought out strategies with I think a statistical edge, and usually a trading plan detailing entry, holding and exit criteria. I have studied diligently and have quite an extensive library of books on technical analysis to refer to. I have been investing in the markets for 30 years, so I have some experience of the highs and lows it brings.

I think I have improved. I have a better understanding of the market now and more appreciation for the issues in making my decisions. Yet still I find myself hesitating, torn between two (sometimes more) courses of action. I don’t entirely blame myself.

The problem is in the market itself. It keeps throwing up unforeseen twists and turns, difficult situations and crises; all with a rapidity that precludes escape.

As an example just this week; the share price of Iluka Resources gapped $2.31 lower from $11.70 to $9.39 at the open on July 9, 2012, following an earnings downgrade. The share price had been in a downtrend prior to this and a smart investor would have already exited no doubt on technical considerations. However for existing shareholders not even a stop/loss at a higher level would have reduced the nearly 20% loss that materialized at the open.

What should one then do? It does not help to review the present fundamentals. The share price discounts the present earnings in anticipation of the future decline in profitability. Further falls are likely, and any rebound in the share-price is likely to take an age to materialize.

From a technical point of view, any rally in a falling market is a selling opportunity. With a fall of this magnitude, the expectation would be for some degree of rally to emerge quite promptly. The market today (July 10) has been a little stronger, up 37c from yesterday’s close at $8.88. From experience the sooner one acts to take an unavoidable loss such as this, the better. I must admit however to having quite often decided to hang on through thick and thin, believing in the company, its management, and the feasibility of its business model.

Fortunately for companies there are many shareholders who are prepared to remain loyal, and wait for better times to emerge.