This column was originally published on RealMoney on Sept. 15 at 12:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Last week, I wrote a column emphasizing the need to
eliminate ego from the trading process.
The gist of it was fairly simple: Accept the reality that being wrong is a prominent component of the trading business.
Embrace the notion of being wrong frequently, and you are well on your way to achieving objectivity in your trading.
Yesterday, I received a very thoughtful email from reader K.P., a money manager who hails from Texas.
He expanded on the point I was making, noting that even if you get past your ego, other demons can make avoiding a big loss difficult.
The most formidable demon of all is hope.
Even after admitting your trade was wrong, you might hold out hope that the position will turn around, at least to an extent that you can get your money back.
If you are optimistic by nature, it is always easy to find reasons -- fundamental or technical -- to hold a position.
That's not ego as much as it is the desire to avoid feeling stupid when the stock turns around immediately after you close your position.
If you don't exit because you hope for a tiny rebound, you might see that small loss gradually develop into a whopping loser that decimates your account.
K.P.'s suggestion for avoiding this unhappy scenario is simply to realize that a 10% loss is much more likely to develop into a big loser than a big winner.
The next time you catch yourself looking at a small loss and hoping it will turn into a winner; remember that you're bucking the odds.
OK, let's look at some reader picks.
One common request has been the price action on
. The stock has advanced for five straight days. The high-volume gap that occurred on Tuesday looks like the start of something bigger, considering that other stocks in this industry group are also on the move.
But if you're not long yet, don't risk being the last one to the party. Instead, wait patiently for a better entry on a pullback. After all, the nearest support level is down at $155. If you buy now, you could have to sit through a bout of profit-taking before the trade has a chance of working. Let braver souls jump on that sword.
is another stock in the financial-services group that's working. Here, the bulls have just pushed the stock up to test the August high; it hasn't broken out yet.
If Goldman Sachs does take a rest, you can bet that Merrill Lynch will, too. Any move above $76 should be confirmed by volume. Consider keeping a stop just below $72. If the stock falls that far, there's no reason to be long.
peaked in April and has been a real bull-killer ever since.
But support at $35 has been pretty reliable. Think about all those folks who have been buying this stock over the past few months at around $35. If the stock falls below that level, they'll all be losers. Many will sell and drive the stock even lower.
began rolling over early in the year. It's close to breaking to a 52-year low. Any further decline below $30 will likely flush out more selling. If you're long, keep a really tight stop to avoid getting caught flat-footed.
I've circled the last two lows in this daily chart of
. The August low occurred after the stock had been walking along the lower Bollinger Band, while the September low was just a quick pop that promptly reversed into the present advance.
After a higher low like this, the reversal is completed when the stock moves above the previous peak. That happened at $36. If you're long, a stop below $36 will only be hit if the breakout is a failure.
Be careful out there.
At the time of publication, Fitzpatrick had no positions in the stocks mentioned in this column, though positions may change at any time.
Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.