Staying Too Long

Let's look at a potentially troublesome behavior - staying too long in a trade. We'll start our scenario this way. You enter a trade on a good signal and at the proper moment. The trade waffles a bit, then takes off in your direction. You watch, fascinated as your profits increase and you start to project where it could end up - and how much more money you could be making.  The market zig-zags onwards in your direction, and then one zig-zag is a bit larger that the others and really pulls back. But by now, you're used to this to-and-fro movement and you convince yourself that the trend is intack and that you can make even more than you have at present. So you remain in the trade. Except now the zig-zags are moving against you and your potential profits are vanishing. Finally, you exit the trade at a much less advantageous level.

The keys are, you watch fascinated; one zig-zag is a bit larger than the other; and you convince yourself that the trend is intact. Let's analyze each of these in turn.

I had previously talked about our ability to become entranced by television and the computer: Brain Wave Entrainment and Brain Wave Entrainment, Part 2. Here, the price bars or your DOM display bounces around at s frequency that can induce an Alpha brain wave state. In such a state,you become calm and relaxed,  fear vanishes, andyou become suggestible. It is as if you are in a light hypnotic state; and for all practical purposes, you are. So it becomes easy to convince yourself that your dreams of ever greter riches are true and that the market will turn back around and give you your reward - a big jolt of Dopamine.

But in this pleasant dream-like state, you've missed that observation that the zig-zags are now turning around. Or you miss or ignore your exit signal. Or you decide that your profit target is insufficient and you hold out for more. Whatever. You are now entranced, and so you stay in the trade until, suddenly, the pain of loss and realization hits and "breaks the spell." Except it's not a pleasant kiss by Prince or Princess Charming. Instead, it's a smack in the mouth and a sour taste. And so you finally exit the trade and wonder what happened and why you did what you did.

Now you have an explanation.

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