How To Avoid Online Trading Trap

March 26, 2010

How can we respond to this pressure, this demand? When we notice the impulse to trade based on strong fear, it is usually best to literally step out of the trap by stepping out of the situation.

Only after you’ve had a chance to get out of the situation and shift your attention should you even consider taking any action in the form of a trade. Often, when you return to the computer, you will have lost the panic reaction and be more ready to think clearly about what you want to do.

Almost all trades done in panic mode will be regretted once you have calmed down and rationality has returned.

The 1 percent done in panic mode that works out to your advantage will be the result of luck, not good decision making.

Think about this and see if it’s not true for trades you’ve made out of strong fear or panic. We’re not talking here about mild anxiety, which is a common reaction to having your money on the line. So, it is important to learn how to get away physically and mentally when we begin to notice the panic mentality taking over.

This need to get away when we feel too much pressure to do something is one of the reasons I favor doing one’s online trading at home or at the office rather than at a professional trading firm. At a firm, the demand characteristic is easily magnified by the dozens of others around you, feeling the same fear and panic.

When I would hang around the local trading firm, I noticed that during normal market conditions, almost no one ever left the trading floor for a break. Hours would pass, but no one ever walked out of the large room.

The windows were darkened so traders could not see out. Some would periodically walk around the floor, use the bathroom, or stop by a table for a cup of coffee or donut. But they didn’t take what I believe to be the necessary breaks by stepping out of the situation.

Since no one is trading continuously over the many hours the market is open, there is no good excuse for not taking breaks by walking outside into the sun. But no one did it. I consider this a psychological error in judgment.

They felt a demand to stay glued to the computer monitors in case they might miss something important¬°¬™maybe a news flash or sudden change in the S&P futures. The flurry of rapid, continual activity creates a sense that you just can’t take your eyes off the numbers for very long.

But it’s not true. The market is not going anywhere! There is always another trading opportunity and another day. While this is obvious on one level, too often when caught in the anxious moment, we “forget” this truth.

All online traders and investors who are not day trading 1000-share lots (or more) and looking to gain a quick eighth or quarter of a point have the luxury to step away from the monitor and shake off fear and panic.

Even under everyday, nonpanic conditions, periodic breaks away from the monitor over the course of a market session are crucial. Not only do they give you a chance to stretch your body and re-focus your eyes on something besides a monitor, they also give you the necessary mental break.

Catching Fear from the Media

As an example of how real-time commentary may aggravate your stability, you need only watch CNBC during a market correction. Personal fear is intensified when we hear numerous “experts” on CNBC tell us how terrible things are.

As the gloom and doom is passed around, we find ourselves being infected by it. This may lead to premature decision making to sell positions rather than ride out the rough period. Many viewers are influenced by what these experts say, even if these commentators have no real idea where things are headed. This is one of the effects of taking market experts too seriously.