Beating A Costly Habit

Tony began trading in 2005, after deciding he wanted to invest $20,000 into the Australian stock market. His goal was to select a handful of stocks that would hopefully appreciate enough over a 6 month period to outperform the rate he was receiving through his savings account.

Once 6 months was up, he’d re-assess his holdings and set a new goal. It was a simple goal really, but a goal that he found so hard to keeping with early on that his attempts to reach it almost cost him his pride and dignity.

Selecting the stocks was not the hard part; no, what caused Tony problems was his inability to stop watching the day to day fluctuations of his stocks. He felt compelled to check almost hourly the price of each of his 6 stocks, whilst trying to run another business.

One of the reasons this is fruitless is because Tony’s time horizon was 6 months. What happens hour to hour, and even day to day is quite irrelevant. Sure, you need to keep abreast of your portfolio, at least to ensure nothing untoward has occurred, however this is the theory behind stop losses. Before purchasing a stock you must already know what you’re willing to lose before you force yourself to sell it.

Another more important reason is that the hourly fluctuations, be they up or down has a chemical and therefore emotional effect on your mind and body. In other words, every time Tony looked at the stock prices, if he saw they were up from the last hour, his mind released a chemical that triggered a nice feeling inside; but every time he saw a stock price that was lower, the chemical released caused him to feel bad.

In isolation, this is not so bad, but doing it over and over again, will have a dramatic effect on Tony’s energy levels, but worse, his emotional strength will begin to wane.

For starters, Tony’s inability to stay away from the markets during the day was caused by a couple of things. One was his lack of knowledge about the stock markets and how they operate. He was aware that price moved around on a chart, but he had no idea why. He was almost praying to the Gods that these gyrations stop just while he was in the market.

Secondly, he hadn’t assessed his risk tolerance, which needs to be done to determine when a stocks price becomes too low that even the dividends aren’t enough to compensate; this would have been his stop loss exit point.

Thirdly, he wasn’t aware that his actions were the cause of him feeling down and with very little energy. In fact he didn’t put two and two together until he realized that on the weekends he had more energy. He asked himself, “What on earth am I doing during the week but not on the weekend? I run my business 7 days a week, I’m with my wife 7 days a week, and I see the same folks 7 days a week.” And then it hit him. “I’m watching the markets during the week!”

Tony decided to get help, and called his friend Jacob who had been trading for many years. Jacob proceeded to tell him why he was doing what he was doing, but more importantly how to fix it. This was what he told him.

Write down the following; ‘my stop losses are in place, I know that I’m willing to close my positions at these levels should they be hit. I don’t care what the price of my stocks do during the day or even for the week. At the end of each day I’ll permit myself to look but that is it.’ Underneath this create a ‘20 by 6’ grid or graph.

Next he told him to add this to his ‘to do’ list for the day.
• Call Jacob (or send an SMS or email) at the end of each day with the number of times he checked his stock prices.
• Tell his wife at the dinner table how many times he checked his stock prices.
• In the grid he created, write down the number of times he checked his stock prices.

Jacob proceeded to tell Tony that the reason he was doing this was to wean him off the habit. Habits are hard to break in one swift move, but are quite easy to beat using a gradual method. On top of that, Tony might even feel that his habit is so below him that he’ll kick it even quicker just so he can stop doing his silly ‘to do’ list.

Either way, what Tony has done has admitted he had a problem, and has done something about it. The method used may seem a little simple and even juvenile in approach, but its effects are profound. One thing Tony won’t do is not fulfill his promise to Jacob, he has too much respect for him, but he also knows that if Jacob feels he has beaten his habit he’ll let him know.

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The team at Pentagonal Trading