Link: Making Sound Financial Decisions Under Fear

Sep 11, 2007: 11:09 AM CST

With the recent declines of February and August 2007, many traders – who were rapidly making money – experienced deep fear and losses and may now approach the financial markets differently as a result of these ‘shock’ declines and potential major account losses. It only takes one or two instances where you are shaken to the core by your trading losses to develop a ‘fear mentality’ and approach the market hesitantly until you can process and overcome these potentially internalized fears.

Dr. Steenbarger recently posted a brief article regarding decision making under conditions of fear where he addressed such concepts.

He also provides a excellent link to a resource that details what happens to specific brain regions and structures under conditions of risk and uncertainty.

Dr. Steenbarger notes what many traders have found to be true personally: Our brain (and our behavior) functions differently under extreme emotionality rather than calmer times.

He then suggests three points or tips that we can do to reduce the effects of the biological phenomenon, which are summarized as to “clearly articulate the rationale behind each of our investment or trading decision.”

Furthermore, he summarizes, “Reducing trading and investment decisions to a few criteria and then mentally rehearsing those… is a great way to stay grounded during periods of uncertainty and volatility.”

Browse over to his site for the complete article, including all his suggestions and tips for success under uncertainty.

8 Comments

8 Responses to “Link: Making Sound Financial Decisions Under Fear”

  1. Glyn Says:

    Hi Corey,

    Is it possible IBM could make a tripple top at resistence around $118? Also see the same with AMZN ~$86 – I guess you need a down move for confirmation (AMZN) and a bounce off resistence with IBM to be sure?

  2. Corey Rosenbloom Says:

    Hi Glyn,

    Is it possible for IBM? Absolutely, but odds would first favor a possible double top, which may be happening currently. Triple tops are far more rare, yet their occurrence has greater predictive value.

    You’re right about Amazon. I still don’t see a triple top, but rather a double top with evident buying momentum divergence (aka ‘sell divergence’).

    Recall that in technical trading, waiting for confirmation often will force you to miss the move, or enter with a much larger risk parameter.

    If you want to get short IBM or Amazon, a double top or ‘retest’ combined with a momentum divergence may be your best bet, if only from a risk/reward standpoint.

    You might risk $1 or perhaps $2 (if aggressive) when price hits resistance (or you could even risk less – perhaps $0.50 for both) and then play for a target of upwards of $5 to $10 possibly.

    Plus, if price continues through the proposed resistance area, your idea was wrong and you should be out of the trade and moving on elsewhere.

    Good ideas, both of them! Thanks!

  3. Glyn Says:

    One more to consider – BBY – looking at a 12mth daily candle chart I think it shows a declining channel formation (I’m sure there’s a technical term for this)with resistence at $43 which its bounced off 3 times – would appreciate your views on this. Regards

  4. Corey Rosenbloom Says:

    Hey Glyn,

    You’re precisely right! I would call it a declining channel, or extended channel (with directional bias downward) or descending channel. Price has been resisted at increasing lower levels and support also at increasingly lower levels. The trendlines of highs and lows are established and tested various times, adding to possible predictability and greater odds of trend-channel continuation.

    If you’re looking to go long for a quick swing trade, this might be the zone for it – again if for no other reason than your risk is greatly controlled. Price is at $43 with the channel bottom (barrier) at $42 (stop just below there – maybe $41.50) with upper price target at $46 to $47… you risk $1 to gain $3.

    Price appears to have consolidated and we are seeing a positive momentum divergence. The stock – in consolidation mode – is not respecting its key moving averages for support or resistance and we would expect this.

    For added upside probability, price is at the lower bollinger band, indicating a great probability for at least a retest of the midline (20 period MA) at $44.

    You could put on a hedge trade from the three stocks you’ve mentioned:

    Short IBM or AMZN and then long BBY – all for small targets. If you’re stopped out of one, you’ll lose $1 to $2 but on the one you win (if you hold it ’till target) then you’ll make $4 to $5. Perhaps you’ll win on both trades, but with a hedge, you can expect decreased profits, but more reliable profits.

    I may highlight Best Buy soon if not tomorrow if there aren’t other major issues to highlight.

    Thanks!

  5. Glyn Says:

    Hi Corey,

    Thx for the comments. Some feedback:
    (1) I’m short BBY on Sept $42.50 but your comments on balancing that with some calls (Sept $45) makes good sense. You call a ‘barrier’ at $42 based on low of the day from Aug 16th? Lok fwd to your coverage.
    (2) Re AMZN closes – July 25th ($86.18), Sept 6th ($86.21) and 11th ($86.28) price seems to top at/~ the same resistence line – to constitute a triple top does it need to be exactly the same price or within a given time frame?
    (3) Re IBM closes – July 25th ($118.10 ), Sept 4th ($118.19 ) and 5th ( $117.88) ditto above comment.

  6. Glyn Says:

    One more for you – China needs some air let out and the inflation figures maybe the warning. What do think of FXI – is that classified as a double top about to test for the 3rd time?

  7. Corey Rosenbloom Says:

    Glyn,

    Regarding BBY, odds favor continuation of an established trend, even if the trend is a sideways consolidation or bracketed consolidation. Traders see these levels and respond to them, and I didn’t nail the exact price of the descending trendline, but it would be near $42. Connect the lows from the beginning of the channel and you will see that trendline. It might not be extraordinarily high odds, but odds do favor a reversal up at that trendline.

    For Amazon, I see two price swing highs, one at $89 in late July and the other today at current price $88.59. I would encourage thinking of the price in terms of “swings” rather than tests back-to-back. A triple top is more of a ‘tree price swings up that fail’ rather than two swings (which we see) and then a few days apart, a retest of the highs.

    The same for IBM. We see $118.40 in late July and $188.89 in early September. Think in terms of price ‘swings’ rather than back to back days.

    Either way, both stocks would be setting up resistance at those levels and odds – and momentum readings – favor at least a reflection down and retracement. If you go short and are wrong, your stop-loss is very close to entry, which sets up very favorable risk/reward, which is what trading is all about.

  8. Corey Rosenbloom Says:

    Glyn,

    Hmm. I see a current “Impulse Buy” trade setting up in FXI, because it made a new momentum high and a new price high and is retracing (correcting) back to the moving average, which would act as support and set up the classic “Impulse Buy” trade which I have discussed. This is a bullish picture and I do not see overhead resistance with price making new highs and momentum also making new highs.

    The ETF is choppy because of times traded, but if you want to hold for a swing trade, and if you are very brave, I would not bet against either the trend or the momentum reading.