Recently most traders probably have spent a great deal of time managing risk and emotions. I know I have. When it comes to correctly gauging and dealing with emotions it is paramount to analyze your reactions in a detached way. The best way to get objective insight is to imagine taking a step back and then ‘watching yourself.’ It’s as if you were your own mentor or trading coach. This is not an easy task. Good results require emotional detachment, a lot of experience and the ability to honestly assess the degree of trading proficiency you have attained. Ultimately it will tell you what those gut feelings you are occasionally experiencing really are worth. That’s exactly what G.C. Selden addresses at the end of his classic trading book : ‘Psychology of the Stock Market’ which was first published in 1912. Here’s an excerpt dealing with ‘hunches and gut feelings.’ Lots of additional and valuable insight for traders is provided. Enjoy!
An exaggerated example of “getting a notion” is seen in the so-called “hunch.” This term appears to mean, when it means anything, a sort of sudden welling up of instinct so strong as to induce the trader to follow it regardless of reason. In many cases, the “hunch” is nothing more than a strong impulse.
Almost any business man will say at times, “I have a feeling that we ought not to do this,” or “Somehow I don’t like that proposition,” without being able to explain clearly the grounds for his opposition. Likewise the “hunch” of a man who has watched the stock market for half a lifetime may not be without value. In such a case it doubtless represents an accumulation of small indications, each so trifling or so evasive that the trader cannot clearly marshal and review them even in his own mind.
Only the experienced trader is entitled to a “hunch.” The novice, or the man who is not closely in touch with technical conditions, is merely making an unusual ass of himself when he talks about a “hunch.”
The successful trader gradually learns to study his own psychological characteristics and allow to some extent for his customary errors of judgment. If he finds that he is generally too hasty in reaching a conclusion, he learns to wait and reflect further. After making his decision, he withdraws it and lays it up on a shelf to ripen. He makes only a part of his full commitment at the moment when he feels most confident, holding the remainder in reserve. If he finds that he is usually overcautious, he eventually learns to be a little more daring, to buy a part of his line while his mind is still partially enveloped in the mists of doubt.
Most of the practical suggestions which can be offered are necessarily of a somewhat negative character. We can point out the errors to be avoided much more successfully than we can lay out a course of positive action. But the following summary may be useful to the active trader:
- Your main purpose must be to keep the mind clear and well balanced. Hence, do not act hastily on apparently sensational information; do not trade so heavily as to become anxious; and do not permit yourself to be influenced by your position in the market.
- Act on your own judgment, or else act absolutely and entirely on the judgment of another, regardless of your own opinion. “Too many cooks spoil the broth.”
- When in doubt, keep out of the market. Delays cost less than losses.
- Endeavor to catch the trend of sentiment. Even if this should be temporarily against fundamental conditions, it is nevertheless unprofitable to oppose it.
- The greatest fault of ninety-nine out of one hundred active traders is being bullish at high prices and bearish at low prices. Therefore, refuse to follow the market beyond what you consider a reasonable climax, no matter how large the possible profits that you may appear to be losing by inaction.
A market which repeatedly refuses to respond to good news after a considerable advance is likely to be ‘full of stocks’. Likewise a market which will not go down on bad news is usually ‘bare of stock.’ – G.C. Selden