Stock Trading: Learn to Trade Objectively to Improve Results
Trading stocks objectively can improve your portfolio.
Understanding Objective vs. Subjective Views
How often do you find yourself becoming subject to unrealistic expectations of market conditions? You lose your objectivity due to fear and greed. That's why you need to remain objective when making investment decisions.
We'll examine the following crucial points:
- What's the difference between objective and subjective trading?
- What happens when you trade based on feelings?
- How to be objective while trading
- Additional means of trading success
- Final thoughts
What’s the Difference Between Objective and Subjective Trading?
An objective view is based on facts, while a subjective perspective is only based on feelings.1
How does this apply to stock trading?
Subjective Trading
While you are involved with an active trade, it's challenging to have a clear head. You try to rationalize your next move without realizing that fear and greed are guiding you as you watch the fluctuations of your account. That means you are being subject to these conditions.
Objective Trading
On the other hand, when you maintain a clear head, remain impartial to market conditions, and make trading decisions solely based on valuable data, you will be trading objectively.
The following table compares the two:
| Objective Trading | Subjective Trading |
|---|---|
Based on facts | Based on feelings |
Unbiased and Unprejudiced | Biased due to fear and/or greed |
Clear-headed | Confused |
What Happens When You Trade Based on Feelings?
Fear and greed can interfere with your trading success when you are subject to your feelings. If you are already invested in the outcome, avoiding these feelings is difficult as market prices fluctuate.
It's easier to remain objective before entering a trade. In that case, fear and greed don't enter the picture.
What Happens When You're Subject to Fear?
When you're already involved in a trade, you're doomed to being subject to hopes of the market doing what you want it to do, rather than doing what your research and due diligence would lead you to expect. As a result, you might fear the outcome and reverse a good trade position.
What Happens When You're Subject to Greed?
As long as there is no fear of losing, you can analyze the data and determine what to expect the market to do. That means you can consider what may happen based on current market conditions.
We all desire to acquire attractive returns on our investments. But that desire is unhealthy when it's built on greed.
Greed is worse than fear when it comes to your trading decisions. It's a bigger obstacle to your success because it can make your profitable trades end up as losses. Even worse, bad trades can become catastrophic.2
Why Fear and Greed Keep You From Being Objective
Greed can cause problems when you have a nice profit and refuse to take it. Instead, you leave the trade going, hoping for more. You think that if it's doing so well, it will continue. That's greed!
On the other hand, how often have you had a stock position go against you, and you feared losing money and didn't want to admit you were wrong? So you imagined it would turn around, and you waited?
That's being subjective. You were subject to your feelings, let your greed get in the way, and let a losing position get even worse. Instead, you could have done some research to make an objective decision.
How to Be Objective While Trading
A healthier method is to do some research before making any moves. Nothing will change so fast that you won't have the time to analyze the situation first.
Trade Based on Accurate Data
Find out why a stock is rising or falling. Then, based on realistic situations you discover from your research, you'd be placing more profitable trades or ending problematic trades.
With accurate data, you can relish the vibrant feeling when you discover an opportunity for a good investment. That's much better than making quick decisions that have no bearing on reality.
When you become used to this method of researching the data, you'll get in the habit of making more objective trading decisions.
Trade Based on Specific Rules
Besides doing research and trading based on accurate data, another way to remain objective is to follow a specific procedure for managing trades.
It's always best to create a plan of action for entering and exiting any stock position and stick to that procedure. If you have a strict strategy and follow that method without letting your emotions, greed, or fear change your plan, you can remain objective and won't become subject to the market affecting your thinking.
That is known as being mechanical. Trading mechanically helps avoid being subject to emotions, and it requires strict adherence to the following rules:
- Plan your entry price and wait for it.
- Plan your exit strategy and obey it.
- Plan any other triggers that dictate reasons to get in or out of a trade. And stick to it when it happens.
- Decide what risk/reward you want and structure your portfolio accordingly.
- Use stop-loss orders to control your mechanical behavior.
- Admit when you're wrong and get out. This one is hard to do persistently. I still fail at it from time to time.
Remember, when involved in a trade, you can become subject to assumptions and unrealistic expectations. So make sure to avoid that condition.
The only way to have a consistent and objective strategy is to create your entry and exit rules ahead of time and stay with the plan by managing it mechanically. As a result, you'll improve your results and have a better chance of profitability.
Additional Means of Trading Success
In addition to maintaining an objective view of your trades, the following list of rules will help produce better returns on your investments.
- Patience: If a trade doesn't look good, don't do it just because you hope it will work. Be patient and wait for a more reliable position to be available. Be selective.
- Avoid Hoping and Wishing: Don't enter or stay in a position just because you hope it will work out. Do your homework; analyze the company and trade based on performance.
- Loyalty: Don't be loyal to a stock position. When you think you're wrong, get out! Don't let a lousy position get worse. It may turn around, but that's just wishing and hoping.
- Size: Keep your trades small enough so that significant market moves don't force you out with a substantial loss.
- Frequency: Don't trade merely to be active or to get another small gain. Remember the rule about patience.
Final Thoughts
Stocks always have only a 50% chance of going higher. That never changes. Just like when you flip a coin, it has a 50/50 chance of being heads or tails. If the coin comes up heads five times in a row, there's still only a 50% chance that it will come up either heads or tails the next time.
It's the same with any investment. If a stock continues to climb, it still only has a 50% chance to move another tick higher. When you're subject to feelings, greed keeps you from selling to take a nice profit, and you end up giving some of it back.
That's why you must always maintain an objective view by doing your research and trading based on sensible data rather than being subject to greed or fear.
References
- Surbhi S. (August 12, 2017). "Difference Between Objective and Subjective" - KeyDifferences.com
- "How Do You Control Greed In Trading?" (n.d.) - ProTradingSchool.com
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 Glenn Stok
