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Stock investing psychology

During my learning period, even today I am experiencing one psychological trap every [tag]investor[/tag] probably went through and every new [tag]beginner investor[/tag] will experience. Some may handle this with a brilliance, some may suffer the similar way I do. I am talking about the psychology during [tag]investing[/tag] into a particular [tag]stock[/tag], which later, after you opened or closed a position, you may experience feelings involving double guessing the [tag]strategy[/tag].

Have you ever experienced that you have opened a position of a stock, and you were watching your stock growing, but suddenly one day it turned down and your [tag]stop loss[/tag] order kicked you out, then the stock turned back up and continued running up without you? I have been dealing with this issue all the time and this particular part of investing always lost me [tag]money[/tag]. Originally, I was trying to apply my stop loss the way many books recommend to do. Even [tag]Jesse Livermore[/tag] and [tag]Nicholas Darvas[/tag] used to apply the stop loss order similar way: set the stop loss at 7 – 10% below your purchase price. To be honest this never worked for me well. I understand the importance of using stop loss orders and this is a particular part of the strategy I will never omit. Well, except in certain circumstances when omitting a stop loss order is a part of the plan of a new position. I did it couple times when I set the stop loss two or three days later to avoid getting me out of the position the same day in a volatile market. However, it didn’t help either. Soon or later I was out anyway. So how can I protect my money against loses we have experienced recently while not to be collecting small loses of executed 10% stop loss orders? A solution was applying a stop loss as recommended in [tag]Reverse Scale Strategy[/tag]. I changed the limits on stop loss to 25% instead of 50%, since typically when the stock drops more than 20% it is more likely because serious [tag]financial[/tag] or another difficulties than a regular correction in a price run. However, even with such large range I am experiencing the same psychological problem over and over. I invested into AFAM. See what happened recently:

AFAM

The lower green line indicates my opening position level (I have bought AFAM in August 2008, which is not visible on the chart). During October 2008 it oscillated around that level and at the beginning of November 2008 it shot up. I was happy for it and it seemed that the market would do well during the election month. After couple days it hit my first decision point for pyramiding, so I added another number of shares into my [tag]portfolio[/tag]. However since then, the stock was slumping down along with the entire market.
This evokes a question whether it is correct pyramiding during bad [tag]market[/tag] conditions or not. If the strategy says: do not open any new positions when the market is in correction; is this rule applicable for any positions or just new positions?
Then the stock hit my stop loss level (1). It was just one day drop under this level, which however, counted to a total loss of 25% of its price within about 10 to 12 days. Is such quick loss abnormal or could it still be considered as a correction of a fast upward move? If so, I should move my stop loss to a 30% level then.
After the entire position was sold, the stock turned up and continued upward without me. This was the most frustrating situation and I asked myself questions like: Should I have selected lower level of a stop loss, so I still would hold that position? Should I have bought it back immediately after a turnover? I could have a great gains then, but the market wasn’t ready for a new buy. Am I losing a great opportunity of making money, since my portfolio is in cash?
When you take a look at today’s move of the stock (2) you can see that the stock’s run stopped. OVB turned down, which may indicate a turnover in trend and in next couple days, the stock can continue down. It can be oscillating in the $39 – $51 price channel and creating a base, who knows. There is only one sure thing: I am not going to invest money into the stock until the market will be in confirmed rally and the stock will pass through my screener. It is tough watching the stock running up without you. It already happened to me, see the chart:

AFAM chart - missed gains

Dow Jones index

I started watching this stock sometime in May 2008 (1) after it opened with a gap. I waited couple days whether the stock would close the gap or not. It didn’t happen. I was ready to buy, but the stock market wasn’t in a [tag]confirmed rally[/tag] so I waited. Then, the stock price stopped in its move and it continued sideways in a channel identified with the two blue lines. In June 2008 it broke up (2). At that time, the market was still choppy and not in conditions for buying. Most of the time the market was in correction. The stock offered another opportunity to buy (3), but the market still wasn’t in a rally, so I was waiting. In August I finally bought the stock (4)(5). It was when the market finally went into a confirmed rally. However the rally was a short live one and the rest of the story you already know. So this stock run up during all time, when the market wasn’t and it made 100% gain, which I have missed. Look at the chart of Dow Jones Index underneath the AFAM chart to compare what the market did at the exact same time.
Isn’t this tough to handle it? During bad market some stocks may go opposite, but it is very rare situation and I would rather stay aside than undertaking way larger risk of losing money. During a bull market there will be plenty of other opportunities to buy stocks while risk will be lower than it was in the situation described above.


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