Don't let your emotions ruin your portfolio
March 3, 2022
This week's midweek commentary is titled:
'Emotions have no place in trading.’
In a world of figures, your emotions will let you down.
The Platform has been running for a while now, and we often get many of the same questions.
There are no silly questions when it comes to trading. It is a very complex and difficult job, but we’ve been doing it for so long now, that sometimes, we forget that our users don’t always understand how the traders make the money they do.
The first thing to note, when looking at trading and how to make money, is that there is no crystal ball. It’s extremely hard and nobody knows when the market will turn one way or the other; put all the information you have together, and make the most informed decision you can.
Have a strict set of rules, when to get in, when to get out, and stick to them. If you fall foul of your emotions you will make the wrong decision.
We don’t allow any communication between investors and traders because if we did, the most commonly asked question would be, ‘why didn’t you sell higher up?’; closely followed by ‘why didn’t you buy lower down?’ and communication like that can do a lot of damage and cause second guessing.
As I said, no trader has a crystal ball, and while we have a better idea than most as to what the market might do, nobody ever picks the top, or the bottom.
If you are looking at your equity balance on The Portfolio Platform, and it is lower than it was yesterday, you might wonder why the trader didn’t sell out.
To many this is a silly question, and on the face of it, it is; but if you haven’t traded before, you might not realise why.
The simple fact is, the trader didn’t know what was going to happen the next day; if they had, they would have sold.. That’s it.
Traders are not magicians and their knowledge will lead to profit over time, but not every time and not in a straight line.
You have to bear in mind that you are looking at a portfolio with the benefit of hindsight and hindsight will always be the best trader of all. The fact is, nobody knows whether it will go up or down from one day to the next.
BUT, we can make decisions based on the most likely outcome which will result in profit more often than not.
Buying at the low, or selling on the high, might happen on occasion, but I would liken it to a golfer getting a hole in one. They could hit the same shot 50 times, and once, it might go in, but the more likely result is, they will get it close, and that is good enough.
A strategy could trade by the same rules, be hugely profitable, but might never get the top, or the bottom.
A trader must forget about the ‘holes-in-one’. It happens, but it’s not what makes the best golfer, or in this case, the best trader. It’s all about averages.
At TPP we look for traders who perform consistently, over time.
At The Portfolio Platform, we select our traders carefully. We aren’t looking for anyone to make huge returns in a day, or a week; we want returns year on year.
We want investors to make money, every year, but we know full well, that during that year, there will be winning trades, and there will be losing trades.
One of the problems we have created for ourselves, is from being so transparent. Our users (you) can see your position and overall value of your account at all times. The reason this is dangerous, is the same reason 80% of retail (not professional) traders lose money: emotion.
To be a profitable trader, you have to trade by a strict set of rules. It is these rules that make the ‘Strategy’. By implementing an algorithm, you are doing the most important thing of all: taking emotion out of the equation. It is the single most common reason that self-investors lose money.
Every time an inexperienced trader places a trade, there are 3 emotions that will set in at one point or another: greed, fear & regret, and any of these is powerful enough to overcome logic.
With experience, they can be controlled, without it, this is what you will feel:
You place a trade, it goes up in value, it even reaches the level you wanted to sell at, BUT, you get greedy and think “How much MORE can it go up?”, “This is just the beginning, if I just hold onto it a little bit longer I’ll make even more”.
It doesn’t matter if it keeps going up for a bit. You made what you wanted to make, so take the profit, pat yourself on the back, and wait for the next one.
If you don’t sell out and it goes back down, you won’t have made any profit at all, even though you were right!
Remember that people will only tell you about the winners. Take Bitcoin as an example, we’re hearing a lot less chatter now it’s dropped 20% from its highs. People rarely tell you when they’re losing money.
Only liquidated profit, is real profit, until then it is hypothetical. The stock could drop back down, and make nothing. You need to book a profit for it to be realised.
Another common mistake is increasing the investment because it’s going well, rather than selling out. If it went up for the very reason you bought it, then the trade worked, sell out.
If you are simply buying more because it’s going up, you could lose your profit twice as quickly.
If you buy 10 shares at £20, and it goes up to £28 as you had hoped: you have made £80. If you then get greedy and think, ‘this is easy and it’s working, I’ll buy another 10’, it now only needs to drop to £24 for you to have lost all your profit (20 x £4 = loss of £80).
In this case, even though you were right, and the share went from £20 to £28, you haven’t made a penny. Even at £24, the shares are higher than when you bought in, but you haven’t made any money.
In fact, if the share drops back down to what you originally paid for it, you’re actually now down £80, rather than up £80, because you got greedy.
Every trader knows this one well, no matter how experienced. It’s fear that most traders are experiencing right now with the Russian invasion. Markets panic. Do we sell out, or buy more?
Nobody can be sure, but in time, there is a good chance stocks will be worth more than they are today, due to the current fear in the market eventually dissipating. Take out the fear, and prices would be higher, therefore, the logical answer would be to buy. It might not happen tomorrow, but trading for tomorrow is a fools game.
It’s managing that fear, and knowing how and when to ignore it that will make profit. Having a strict set of rules helps override this fear. I will buy at £20, and I will sell, if it gets to £28.
Knowing this, whatever happens in-between isn’t important. The only thing that might change, is the world around you and if this means that your model suggests getting out of the trade because the variables are different, then get out. Don’t change your mind based on an emotion, but information.
The fear of losing money can cause you to sell the stock as soon as it goes down in value. Nobody likes losing money. If you pay £20 for the stock, you cannot expect for that to be the cheapest it gets while you hold it. That would be the stuff of legend. It will almost certainly get to a lower level, but you paid £20, because you believe it will reach £28 in time.
If it hits £16 first, you might sell because you now fear losing more money. Fear might make you sell, but the stock still reaches £28 at a later date. You were right, but you lost money.
The fear of loss is a much more powerful motivator than potential profit. If it wasn’t, insurance companies wouldn’t exist.
FOMO, or fear of missing out, is such a common phrase it has become a well-known acronym. Everyone is buying this stock and it’s gone up; ‘I will buy it as well even though I have no information suggesting it is cheap’.
This has fuelled the retail market over the last year or two and leads to an inflated stock price that will eventually, always, fall back down. If the move has already happened, you have missed it, move on. Don’t succumb to FOMO.
Lastly, we have regret. This one we hear all the time, people regret buying a stock, people regret not buying a stock, selling too soon, not selling soon enough. And then they think they won’t make that mistake next time.
If we use the same example as before, you buy a stock at £20, looking for it to reach £28. Then it gets to £28 a month later, you do the right thing according to your model, and sell out. It then goes up to £32, at which point, you regret selling out too soon and now you’re missing out on profit so you buy back in.
The stock now only needs to drop to £24 for you to have lost all your profit from the initial trade.
This works similarly on the downside. You buy the stock for £20, but it drops to £16. You regret buying it so you sell out because you fear losing more, it goes back up to £20 at which point you regret selling it out so you buy it back………and so on.
In short, without experience, and without knowing what you want from a trade you’ll be riding an emotional roller coaster every time, and you won’t make any money. Around 80% of those who try, fail. It isn’t a game, and it isn’t easy.
Buying the bottom and selling the top, isn’t a real thing. Be happy with profit, and keep looking to build on that profit. Small gains over time, make bigger gains.
We have selected the best traders we can find from all over the world and we know how to do this because we are traders ourselves.
Our traders are not in it for the glory. It’s not about ‘the big short’ or a ‘quick million’. They have rules and risk parameters, and we make them stick to them. This might mean some days a strategies will lose money. This is normal and expected. Don’t look at the days, or sometimes even the months, funds are judged on annual performances, as being right can take time.
Now that you are on The Portfolio Platform, you can see every trade that is made. You will experience many of the emotions I have described, but rest assured, our traders know what they’re doing and over time, their profits speak for themselves.
Right now, fear has made the markets drop. Fear will always provide an opportunity to buy equities, because it’s an emotion, affecting an economic valuation. Buying when things are cheap will make money. Waiting for fear to leave the market, and buy once stocks have gone back up, will not.
Have faith in the figures. Our performance records cannot be faked, they are 100% accurate and verified and we stand by our traders.
Last year, TPP traders averaged returns of 61%. The year before the average returns were 58%. The start of this year has been volatile, but when the dust settles we would expect our trading teams to be well positioned.
For more information, please contact us here
“TPP might just be about to revolutionise investment for the retail market.”
- London Stock Exchange 2020