Shrink Rap: Inner Crows Cawing in Conflict

An "inner process" stands in need of outward criteria.
-- Ludwig Wittgenstein

Dear Shrink Rap: I would like some help with the following trading psychology problem. Consider the recent chart below of Biomira (BIOM Quote). My personal trading playbook says that when the price rises above the Bollinger Band by the amount shown on Oct. 28 -- sell. As I observed the action on that day, the price pulled back from $1.95 to $1.75. I was fully aware that I was supposed to sell, but I couldn't bring myself to do it.

Instead, I got out the following day at $1.45. Masking the "Black Crows" of the last three days, the pattern-recognition part of my mind saw an exponential curve rising much higher. I had the following internal conversation:

Rational voice: "The price tomorrow is almost certain to be lower."

Party-time voice: "This time it's going to be different, it's going to the moon."

Rational voice: "I know better, and if you want to play like that it will cost money. OK, play (to my obvious regret the next day)."

There are other cases that have been more expensive. I give in to my party-time self in ways that cost money, when I know better. How can I honor this aspect of myself without giving in to its expensive whims?

Now Who's Smart? This investor ignored a playbook

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Shrink Rap: You chose to blatantly disregard two indicators -- Black Crows and Bollinger Bands -- that you use to determine your sell discipline. The Black Crows are three consecutive down days with closes at or near the bottom of the day's range. You refused to take this as a warning of further weakness to come, against your better judgment, instead imagining a curve heading up.

Bollinger Bands are lines plotted in and around the price structure of a stock to form an envelope. The price action near the edges of the envelope provides relative definitions of highs and lows for a stock. Again, you refused to follow your own discipline, which gave you a clear sell signal on Oct. 28.

My guess is that a few things were happening that made you disregard the data before you. To begin with, your greed made you visualize an "exponential curve rising much higher." This was pure wishful thinking, and it was strong enough for you to choose to ignore the actual signs you were getting from the price action. When wishful thinking clashes with the reality of data, the data always triumph -- at least when it comes to trading stocks.

Next, once the price fell below a specific level, you left it up to your discretion in choosing to sell, rather than having a stop-loss order already in place. Had you entered both a limit order to sell at your target above the Oct. 28 Bollinger Band, as well as a stop-loss order to protect yourself from the downside, the visualization you did with the chart wouldn't have mattered; only the numbers would have counted.

You complicated this by holding the position overnight, which I assume wasn't your original intention. This made for further loss than you would have suffered had you simply had the stop-loss order in place.