Stock Exchange: Are You Trading On Psychological Tilt?

The Stock Exchange is all about trading. Each week we do the following:

  • discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Is The Market’s Momentum Back?

Our previous Stock Exchange asked: Is The Market’s Momentum Back? We described momentum trading as strategy whereby traders buy or sell according to recent price trends. And following the harsh Q4 sell-off, we noted the market continues to trend higher this year.

This Week: Are You Trading On Psychological Tilt?

Following the harsh Q4 sell-off, many traders have been trading on tilt so far this year. More specifically, they’ve been allowing their psychological disposition to override their objective trade setups and decisions. For example, according to the always on-point Dr. Brett Steenbarger:

“I’ve been hearing from many confused traders who have underperformed the overall market during this run from the December lows. The common refrain is that they are waiting for a pullback to enter the trend–or they are looking for the start of a larger move to the downside. I heard this late in January, then in February, and now in March. Aren’t we due for a substantial correction?”

Dr. Brett goes on to explain:

“getting locked into a view is a classic case of ego-based trading, where being “right” becomes more important than following the market.”

And for a little more perspective on trading with tilt, in this video, Steve Spencer from SMB Capital explains that “trading on tilt” is:

“when the rationale part of your brain basically shuts down, and you start doing crazy stuff.”

As a trader, you have to ask yourself, “are my psychological and behavioral biases getting in the way of my better judgement?” 

Phil Hubner from “Bps and Pieces” offers some advice on how to make yourself better off:

He explains “if spend a lot more time in the left column than the right, I have a high degree of confidence you’ll be better off in the end than most.”

Model Performance:

We are sharing the performance of our proprietary trading models, as our readers have requested.

Controlling Risk:

We find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

Since many clients combine the trading models with our long-term fundamental methods, they have additional diversity of methods without the need for short-term timing.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.

Holmes: This week I sold my shares of Lululemon Athletica (LULU). You may recall I purchased them earlier this month on March 4th.

Blue Harbinger: Yes, I recall that purchase. You explained that you are a technical trader focused on dip buying. But why did you sell?

Holmes: The set-up was right for the purchase, but I wasn’t seeing the price action I was expecting, so I exited this one. There’ll be more setups and opportunities ahead.

BH: Oh, so you’re basically saying you chickened out and sold out of fear.

Holmes: No, that’s not what I am saying. I don’t trade with the same psychological tilts as you humans. I am an objective technical trading model, and when conditions aren’t right–I exit my trades.

BH: Alright, well I see from the earlier performance table, you made some money this week, so congrats. And how about you, Road Runner–do you have any new trades to share with us?

Road Runner: I bought shares of the New York Times (NYT) this week.

BH: Really? Why?

RR: Because I like to buy stocks in the lower end of a rising channel, and then hold them for about 4-weeks. Here’s the setup on New York Times.

BH: That stock has actually been on fire so far this year as you can see in the following chart. It’s been volatile though. Don’t you think it’s due for a pullback?

RR: I hold my positions for 4 weeks, and then sell. I am a computer-based trading model, so I don’t have the same psychological biases as you humans do.

BH: Maybe it’s for the better. New York Times did significantly beat revenue expectations for Q4 anyway.

Felix: I don’t have any specific trades to share this week, but I do have a ranking to share. I am a momentum-based technical trading model, and this week I ran the stocks of the Russell 2000 (Small Caps) through my model, and I’ve ranked the top 20 below.

BH: Thanks for sharing those rankings. I know your holding period is a lot longer than the other traders–typically around a 66 weeks. It’s always fun to see the stocks you like.

Oscar: I have some ETF rankings to share. As our resident sector/ETF rotation model, this week I ran our “Comprehensive and Diverse ETF Universe” through my model, and the top 20 are ranked in the following list.


With the market rebounding this year, it may seem like “we are due” for a pullback. However, a lot of traders were saying that in January and February too, and it hasn’t happened yet. Trading based on what you think the market should do can be a psychological trading error that prevents you from making money. If you are wrong on a trade, that’s fine–it happens. But don’t stick to bad trades just because your ego and/or psychological biases are getting in the way. In fact, don’t enter trades that are based on your own tilted psychological biases either, if you can help it.

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome. Your can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

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