No Lust for Tesla

NEW YORK ( TheStreet) -- By the time you see the flashing lights of reality, it's too late. Like a car sliding out of control unexpectedly from a dangerous patch of black ice; if you're emotional, you're dead. Even when you know what to do, your hands may not move, as if refusing to follow your commands.

Witnessing your stock position aggressively and relentlessly plummet against you is a traumatic emotional experience that sends many portfolios to the grave. After Tuesday's momentous decline for Tesla's ( TSLA) shares, the reality of how cruel and capricious the market is, becomes crystal clear for those unprepared.

Most people freeze, unable to think under the strain of pressure, simple tasks such as carrying on a conversation or solving math equations turns into impossible feats of mental anguish while engrossed in an exposition of wealth evaporating right before your eyes.

The reason why professionals constantly warn investors to place stop losses manifests conspicuously. But we are getting ahead of ourselves. This story begins much earlier, when the band was playing loud and the party was just beginning.

A month ago, the idea that Tesla's shares could fall wasn't a serious question asked by many investors. After watching 52-week high after 52-week high broken, combined with nearly unfettered positive media coverage, many investors didn't give nearly as much thought to how much they could lose compared to how much they thought they could make.

Lust for profits rode shotgun while reasoning, logic and historical reverence took a backseat. Lust is part of human nature and doesn't go away. If investors could turn off the impulse to act on emotion, they would have done so long ago. Instead, history repeats itself over and over.

Or maybe more accurately, in the wise words of Mark Twain, "History does not repeat itself, but it does rhyme." The price of any given stock rises and falls based on the emotional mob-induced whims of market participants. As long as people are involved, it's safe to assume the market will continue to rhyme also.

Want to know why reading stock charts is so effective for some people? It's because charts are measurements of market sentiment without regard to biases or informational shortcomings. Pull up and review a Tesla chart and change it to a weekly timeframe. If you have DeMark indicators available, you will notice something extremely quick. Last week, Tesla's weekly chart indicated what professional investors know as a TD13 exhaustion level.

The number 13 is highlighted on this page for a exceptionally compelling reason. For those who don't know, it often marks the upcoming penance for lusting after profits instead of portfolio chastity.

For investors who understand that bears make money, bulls make money and pigs get slaughtered, that13 signals that if you're not taking money off the table and locking in your profits, you better keep your hand on the shifter so you can exit quickly.

An accelerated stock is an incredibly seductive mistress that will leave you twisting in the wind wondering what happened. Your portfolio's best defense against the ravages inflicted from lust taking control is to have a plan in place before your dollars are invested.

Making a plan forces you to think about stop losses and what you will do if the position moves against you. Most investors never think a stock is going to lose money. After all, why buy it if you're not convinced it will go up? But unless you believe you can predict the future, you need to predict the odds, and the odds say

You won't get it right every time. If you know you won't be right every time, then you also know you need a plan to exit if the road becomes hazardous.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog StockSaints, where he writes a journal about his trading activity and experiences.

In addition to TheStreet, Robert also contributes to Real Money Pro, providing real-time trading ideas for stocks, options and futures.

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