"Where Jack' Market Timing Went Wrong: How to Avoid 'BAD Discretionary Trading' Errors at all Costs.”

What happened is that the fear of the very first market timing loss that occurred and the consequences of that loss (telling his wife) prevented Jack from TAKING THE LOSS and admitting that his thesis was wrong. The set-up failed and he could not admit it. So the loss deepened, because his thought was “If I don’t take the loss, it’s only a paper loss that can come back. And I can still escape the pain of the loss and of disappointing my wife.”

This sort of pattern is what I call BAD“discretionary trading.” Discretionary trading or market timing is a system not based on strict technical market timing criteria. It is not inherently bad, but it is more susceptible to failure than is rule-based trading, market timing, and investing.  It is done best when done at the intuitive level. Einstein and Edison both worked at the intuitive level. 

Peter Lynch likely made his investment decisions at the intuitive level. After reviewing the financials, he would ask the presenter to give him 2 minutes and no more as to why he should buy the given stock. He then decided.  After you go through all the numbers, you have to come to an intuitive (clear headed/unbiased) decision. It’s a YES or a NO.

The problem is that intuitive trading only works when the trader’s/investor’s mind is clear. When the trader’s thinking is biased, the biases result in bad interpretations and decisions.  When your mind is clear and truly intuitive, you have the correct answer. You’ll have to prove that to yourself. And avoid pride by the way, because pride will kill your results in the end if you do not transcend it.

When biases enter like “The market SHOULD stop at this support level” or “I can’t tell my wife that I have another loss,” the trader can freeze, even after the support level is violated by the price of the ETF or stock. The loss itself and then the desire to avoid criticism from his wife, become “biases” in a trader’s/investor’s mind that result in INACTION, the failure to sell at a loss.  A HUGE loss results when the loss could have been small and could have been MORE than made up for by the trader’s gains.

So good “discretionary trading” is intuitive trading not tainted by biases. 

Bad discretionary trading is trading without rules while being driven by biases.

Have a set of investing/trading rules and do not waver from them unless you have a very CLEAR and unemotional reason for doing so.  And do so RARELY.  If you do so often, you have a bad habit.

So what would the successful trader have done? She would have sold on a move or a close through his stop, no questions asked.  The successful trader uses stops as a way to protect her assets when her intuitive take on the trading/investing set-up is WRONG.  Shee is not afraid to admit she is wrong, because she knows that by doing so quickly, she avoids the big losses.  And with small losses and bigger gains, she wins in the end. She or he as the case may be is successful.

If you are generally not very “quiet” mentally, “discretionary trading” may create disastrous trading and investing results for you. The quieter your mind is before you trade/invest, the better your results will be.  Re-read my “Fear and Greed” page on the website if you would like a review of how to clear your thoughts and feelings before trading/investing. 

You cannot be conscious as an investor when you are driven by your biases. Drop all your biases (which boil down to your fears and your greed) before trading and investing and you will be very successful not only as a trader or investor but in your life as a whole.