Stock Exchange: Fear Induced Trading Mistakes

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 advise 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: Your Pre-Trade Checklist

Our previous Stock Exchange asked the question, What’s On Your Pre-Trade Risk Checklist? For example, is there an upcoming dividend or earnings announcement that will impact your trade? Are there economic news items to be released or a Fed interest rate decision? Ignoring your pre-trade checklist is usually a bad idea.

This Week: Fear Induced Mistakes

The market’s strong year-to-date upward momentum hit some bumps over the last week, and it’s starting to work some traders into a bit of a frenzy.

Is this an opportunity to “buy the dip” or is it the start of a momentum shift and an extended market decline? The media’s intense focus on the US/China “trade war” and the federal reserve’s interest rate posture are making it hard for some traders to sit idly by without taking at least some kind of action. This is when fear induced mistakes can occur.

Whether you are afraid the sky is falling, or you are afraid you’re going to miss out on a dip-buying opportunity, fear can be the enemy of traders. Some fear can be healthy, but too much fear can lead to unforced trading errors. Just because the media is again working itself into a frenzy doesn’t mean you have to make dramatic trading decisions. Don’t let fear ruin your trades.

According to trading psychologist Dr. Brett Steenbarger’s latest blog post (How to Overcome Fear of Failure):

The fear of failure and loss makes it easy to cut the winning ideas short or stop out of eventual winners.

Don’t let the media or the recent uptick in volatility frighten you into fear induced trading mistakes. 

Model Performance

Before getting into some specific recent trading examples, we are sharing the performance of our proprietary trading models as our readers have requested.

Worth a reminder, our models increase and decrease their cash levels based on market conditions, so the performance in the table can appear more dramatic than reality, especially when considering the strategies are often combined with some of our longer-term strategies as well. For example, Athena is now fully invested and Holmes is only about 10% invested.

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: I recently purchased shares of WPX Energy (WPX) on Thursday (8/1). How do you feel about that?

Blue Harbinger: That’s an independent oil and gas exploration and production company. The share price is highly dependent on energy prices.

Holmes: There is more too it than just that. Nonetheless, I am a dip buyer (you can see the dip in the chart above). However I am currently only about 10% invested (as mentioned previously). My typical holding period is usually around 6 weeks.

Blue Harbinger: I take it you think the strong pullback in the market over the last week will be short lived. I admire your pullback buying gumption.

Holmes: I am an emotionless computer-based trading model, so there is no “gumption” involved. As a non-human, one of my advantages is I don’t get emotional, so I don’t make the same fear induced trading mistakes as many humans do, for example.

BH: As a trading model, you don’t pay attention to as much fundamental data as you could. You’re more focused on shorter-term technicals. However, here is a look at some fundamental data in the F.A.S.T Graph anyway.

Roadrunner: I bought shares of CyberArk Software (CYBR) last week on Thursday (8/1). The company provides software-based security solutions for organizations to safeguard and monitor their privileged accounts. As you know, I like to buy stocks in the lower end of a rising channel.

BH: I see the channel. That seems like a pretty simple trading model. Have you considered things beyond technicals, such as fundamental data?

Road Runner: Generally speaking I like to buy in the lower end of a rising channel. But more specifically, I look for a certain type of situation (some call it a pattern, others may call it a setup, etc.) where the probability of a particular action is not a matter of chance (50/50) but has been historically noted to result in a greater tendency towards a particular outcome. “Trending in a channel” is one such situation. An equity will often “cycle” between the upper and lower bounds of that channel for substantial periods of time.

My model design attempts to take advantage of this property by identifying stocks trending in an upwards channel and waiting until the stock price drifts to the lower bound, making it a candidate for purchase. These types of situations have a relatively high probability of positive outcome with a reasonable profit potential. CyberArk can be seen to be in this type of a situation. This is a short-term trade that has traditionally shown profitability when the right conditions have been met. One way or another, I’ll be out of it shortly – usually after about 4 weeks.


Fear induced trading is usually a bad idea. Whether you are afraid the sky is falling or you’re afraid of missing out on the next big buying opportunity, the results can be less than ideal. Our current market sell-off (over the last week) has many investors fearful, and that’s when unnecessary trading mistakes are often made. Are you resisting the urge to trade out of fear?

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. You can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

You may also like