Just wanted to share an interesting anecdote which was narrated by my good friend. My friend, T.P.Kumar (twitter handle @traderindian) is an avid-reader of books across a variety of subjects ranging from trading psychology to fiction to mythology. He runs into a book store couple of days ago and his eyes were immediately drawn to a book on trading psychology. He checks the price and it is Rs.599. He immediately recalls having seen this book priced at Rs.2,000-2,500 (converting it to INR terms from USD) and decides to go ahead and buy the book.
So far so good. After buying the book he gets back home and after enough deliberation, musters courage to check the price of the same book at amazon.in. To his surprise, the same book was available about Rs.200 cheaper at Rs.370. He sulks and his daughter tells him “you could have checked the price at amazon.in before making this decision to buy”
Even before reading the first few pages of that book on psychology, my friend gets a nice lesson on psychology. He realizes that his decision making was guided by impulse and instant-gratification while the decision to buy via amazon (a cheaper alternative) would have resulted in delayed-gratification. The urge here was to buy the book and not buying it at a better price. More importantly, he did not have any plan of action which is fine in this case as the opportunity-loss was negligible.
Wonder how many of you can draw a parallel between this anecdote and the decision we make while taking a trade / investment. Often times, we have a well articulated trade-plan but things do not pan out as per the plan. We sit in front of the screen and the constantly moving ticker lures us to believe that we should take the trade right now. As always, we do end up taking the trade even without realizing that we had a plan of action to adhere to.
Am sure, most of us know what happens next. We end up executing the trade at the worst possible location and then realize that there was a trading plan. By the time these events pan out and the postmortem is done, the trade is already in the red. We decide to scratch the trade immediately and this invariably happens at around the levels where we ought to be entering the trade as per the original plan.
Sounds familiar. The behavior in both instances – buying the book and executing the trade – is driven by impulse where rationality takes a backseat. That is the reason why trading plan is of importance. But what is more important is to stick to the trading plan.
So, rather than staring at the screen all day long, put in the “alerts” in your trading screen. You need to pull the trigger only when the an alert pops up on the screen. Until then there is no point staring at every single tick.
PS: As I am still undecided about entertaining guest-posts in this blog, I decided to narrate this incident. For all practical purposes, you may treat this as a post written by my friend @traderindian. My contribution to this is just putting a verbal-structure to the experience of Mr.T.P.Kumar.