Mike’s note: Lately, I’ve noticed many people are jumping on emotional bandwagons when it comes to trading. Whether it’s from listening to panicked traders, friends, or just buying random stocks on Robinhood, many people are using emotions to drive their trading decisions.
As businesses are slowly reopening – or closing again depending on what state you’re in – people’s stress levels have been at an all-time high. That’s why I dug up one of Jeff’s “classic” essays where he discusses a timeless trading strategy that helps people strategically use their emotions while trading in volatile markets.
In short, we shouldn’t let doubt or fear be a driving factor in how we handle our money, or, more importantly, how we trade with it.
Read on below to see Jeff’s take on it…
Emotion is a trader’s worst enemy.
But it should be your best friend.
The problem, of course, is most traders let their emotions rule their actions. They buy when they’re feeling euphoric. And they sell when they’re scared to death.
Successful traders do the exact opposite.
Of course, we all know the best time to buy stocks is when there’s “blood in the streets.” The best time to sell is when everyone else is rushing in to buy. The trick to getting it right is to know how to recognize your own emotions, then do the opposite of what they’re telling you to do.
It isn’t easy. I’ve been trading stocks and options for almost 30 years, and I still struggle with trading on my emotions – especially when the stock market behaves as it has over the past few months.
But I think I’ve finally figured it out. The answer came to me when I was visiting my friend Dan in the hospital recently.
Dan was in really good spirits, considering he just had quadruple bypass surgery.
“It’s the drugs,” he confessed. “Every time it gets too painful, I just point to the chart over there and the nurse ups my dosage.”
Dan gestured toward a laminated picture of the pain chart.
You’ve probably seen it before. It’s called The Pain Scale – a picture of a series of faces that range from happy to sad. Its design helps improve communication between hospital patients and their caregivers.
Here’s what it looks like…
The Pain Scale
“How are you feeling?” the nurse will ask.
You just point to the face that best represents your pain level, and the nurse drugs you up accordingly. It’s a remarkably simple way to make sure we get the right amount of medicine. If you’re uncomfortable, you just point to one of the frowny faces on the chart and the nurse increases your dosage.
On the other hand, if you’re giddy beyond belief and you point to the super-grin smiley face, the nurse can cut you off completely.
We should use a similar chart for investors.
Think about it… What better way is there to gauge your proper exposure to the stock market?
Once again, we all know the best time to buy stocks is when there’s panic… when investors are suffering the most pain. And we all know the best time to sell is when Mom and Pop are grinning ear to ear because of the huge gains in their stock portfolio.
A financial advisor could instruct any client, “Please point to the face on the chart that best represents how you feel about the stock market right now.” If the client points to a frowny face, the advisor knows it’s a good time to increase that client’s dosage of stocks.
On the other hand, if the client points to one of the happy faces, the advisor knows it’s time to cut back on the dosage.
It is the easiest investment system ever.
Now that the S&P has fallen and is now steadily climbing higher, I’d bet most investors out there would count themselves an 8 or 10.
Please drug yourself accordingly… and buy stocks.
Best regards and good trading,
Jeff Clark
P.S. It’s easier said than done to refrain from trading on emotions. Especially in volatile times like we’re in now, it’s near impossible not to rush to quick action at the first signs of an up- or downward trend.
I believe my 3-Stock Retirement Blueprint is the best way to gain exposure to the world of options trading without being blown around in a hailstorm market. Focusing on just three stocks, we use options to profit off of the trends in those stocks, as a simple, guiding strategy. This helped me retire at the age of 42, and kept my emotions from leading me to brash decisions.
Along with the blueprint, for just $19 the Jeff Clark Trader membership offers an archive of training videos, Q&A’s with me, special reports, and a monthly trade recommendation. Click here to learn more.
Reader Mailbag
In today’s mailbag, William and Edward share their thoughts on a brand-new special report available for free to Jeff Clark Trader subscribers (members can access it here)…
I already love selling naked puts. And I’m doing great this year with a weekly average of 1% gains since early January.
I also like using the “wheel strategy” by selling covered calls on assigned positions at the original put position strike price. Which means I collect the call, and the original put premium amount. Or, I’ll just keep selling calls on the stock at each expiry until it goes by the strike. It’s a win, win, win.
– William
I love the strategy you discussed, and I’m glad to hear that you’re going to be sending me uncovered put options trades. Thanks.
– Edward
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].