Disciplined Online Investor

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Dr. Steven Hendlin

Dr. Deborah Hendlin

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Excerpted from The Disciplined Online Investor McGraw-Hill, published in July, 2000,
Copyright © 2000, Steven J. Hendlin, Ph.D. All rights reserved.

Chapter 1

The New Millennium Gold Rush

Referring to online investing as the new millennium Gold Rush is not hype. Nor is it simply a clever way to indicate our hope of striking it rich. For a growing number of traders and investors it is simply the truth.
The internet is not only profoundly impacting how we shop, do business, gather information, and communicate. It is also transforming the way the major stock markets and brokerage industry work. Both are changing more rapidly now than in their whole history. This change is toward catering more than ever before to the individual investor who trades online.

We are moving rapidly toward an electronic environment in which we will have the freedom and convenience to be able to wake up at three in the morning, sit down at the computer, and with a few mouse clicks, trade any stock, commodity, currency or index anywhere in the world.

While we are not yet able to plug in to such a grand design, ever increasing numbers of us have already gone West (discovered online trading) and have staked a claim (made a deposit) with a discount broker. We then mine individual stocks to find their kernels of gold.

The goal of The Disciplined Online Investor is to help you, as an online prospector, manage your thoughts and emotions around the process of trading. By doing so, you will increase your chances of success in hitting the vein of gold. And you will come to know yourself better in the process.

Continuing with our new millennium gold rush metaphor, here are some ways the brokerage industry is rushing to accommodate online prospectors.
The Rush to Lower Commissions

By the time you read this, the market landscape will be changing in significant ways to favor you, the online trader. For example, Merrill-Lynch, the traditional brokerage house that resisted online trading to protect the income of its brokers, recently announced they are going to become an online presence, joining the two dozen others who are already at it.
When you have assets deposited with them over a set amount, they will offer you a flat-fee per year trading fee that allows you unlimited trades. Surely, other brokerage houses will jump into the fray with competitive offerings so they will not be left behind.
What is significant about this move by Merrill is that it acknowledges that the old system of paying hundreds of dollars commission for a full service broker is drastically changing. Full-service brokers are realizing that they must offer customers discounts for online trading or they will lose substantial business.
If your full-service stock broker doesn't have any information that you don't have, and can't get it any faster than you can, what added value is he or she providing you to justify charging up to ten times higher commission? With all news and analysis immediately available to you on the net, all you have to do is know where to find it, take the time to read it and learn to understand it.
It is quite possible that in the next few years, individual full-service stock brokers will become the dinosaurs of the brokerage industry. And like dinosaurs, they will slowly become extinct. If you think I'm exaggerating, listen to this story for a clue as to where it's going.
A guy in his fifties comes into my office looking and sounding miserably depressed. He is facing the loss of his home, no longer able to make his mortgage payments. He tells me he used to head his own brokerage office where he managed ten stock brokers, earning a small fortune in commissions.
Because of the explosion in popularity of online trading, in the last two years all of the brokers have left him. They no longer could afford to work for him, struggling to hang on themselves. He had no long-term clients to help him economically survive.
Now relegated to the ranks of working for another firm on commission, he's making almost nothing. He can't afford to pay for counseling treatment. How many other brokers are out there are currently facing a similar predicament?
As more investors migrate to the internet, brokers will be used only by the very well-to-do, who don't care to take the time to manage their own investments, or don't mind paying exorbitant fees for the luxury of having a professional do it for them. Some will keep an account with a traditional brokerage to increase their chances of getting shares of lucrative IPOs.
Full-service brokers will be used by those who simply don't believe they have the knowledge or interest to manage their own investments. And they will act as consultants to provide feedback regarding your own thinking.
Brokers already are forced to compete with financial planners, helping people deal with estate planning, trusts, and retirement issues.
It seems inevitable that the cost for stock trades will steadily go down. This is because competition and increased online trading volume will force online brokerage houses to out-do each other with more and more attractive offerings. They will be trying to win new customers and steal customers from competing houses. Instead of only one online broker offering a fee of five dollars, we will have many.
Before long, online brokerage houses may even allow you to trade absolutely free, just to get your account, especially if you have a large amount of money to place with them. If you think this just can't happen, wait and see. Increased electronic trading by individuals is going to truly turn the brokerage industry upside down.
Three months after I wrote the paragraph above, this piece of news came out: "The chief executive of Lucent Technologies predicted on Tuesday that free stock trades on the Internet will be announced within a year. 'There is no doubt in my mind that within the next 12 months some-one of substantial repute will announce they're going to provide trades free online, with the value of you coming to their (Web) site for other services,' Rich McGinn, chief executive of the New Jersey-based telecommunications equipment supplier, said." (Reuters News, Sept. 14, 1999)
And then, two months after the above news item, comes this: American Express announces in a full page ad that account holders with a $100,000 will trade free, up to 3,000 shares per trade. Those with at least $25,000 will not pay when placing buy orders online, only to sell. The sell cost is $15. The only catch with this offer is that you can only buy the same stock once per day, or you have to pay commission each time after the first. So day traders won't go for it. But active traders holding for at least a day will find it attractive, especially those with the higher balances. Just an example of where the momentum with commissions is headed.
The Rush to Offer More Data

What is called Level I data is simply real-time quotes. A real-time quote tells you the best bid (the price you can sell at) and offer (the best price you can buy at) on any stock for sale at the given time.
It was not all that long ago that getting a free real-time quote was not so easy. Most quotes were delayed, which was OK if you just wanted to get an idea of where a stock stood, but good for nothing if you wanted to trade. A fifteen minute-delayed quote is ancient history in the stock market.
To get real-time quotes, you needed to pay for a separate feed through a satellite or cable TV that could cost hundreds of dollars per month. In addition, you had to use special equipment to receive the quotes. In the last two or three years, free real-time quotes have become readily available at dozens of discount brokerage sites and other stock-related sites.
More elaborate research is now available at a number of stock sites. This data includes past performance charts, real-time charting, technical and fundamental analysis, analysts' reports, earnings estimates, legal filings for initial public offerings, and various other useful information to aid investors. In addition to what is available at web sites, special software packages are available from a number of day-trading companies which offer everything named above plus additional esoteric data.
It is easy for the average online investor to become overwhelmed with the amount of sophisticated data available, especially for those not trained to interpret it. For those who are interested, this is an area that is best approached slowly and carefully, learning one topic at a time. It is not something we can expect to immediately comprehend. We need to remember that instant access to sophisticated charting and analysis in no way means instant comprehension or application of it!
Levels of Access to the Game

For the active trader, the single most valuable offering is what is called Level II quotes. These quotes are for the NASDAQ computer-traded market only. Packages of real-time charting, news, and Level II quotes are now offered for a fairly steep fee ($250-$350 or more per month) at a number of online sites aimed for active traders.
This packaged data, however, may be "free" if you make a certain number of trades per month, depending on the provider. In other words, you will most likely pay something over $500 in commissions per month to get the free quotes.
Over the next few years, Level II quotes will become the norm for all online investors, not just serious active traders. And they will drop drastically in cost even to those who don't really need them or care to use them. But once understood, this tool will be appreciated.
Having Level II data puts you in the position to see not just the best price at any moment, but where all the market makers (those institutions or individuals who buy and sell shares to the public and "make a market") are on a stock stand in relation to each other. You also see what is called time and sales which is a dynamic scrolling list of all transactions and the time they occur.
This data was previously reserved only for market makers or those willing to pay costly monthly fees. It is a speedy and powerful tool that helps level the proverbial playing field for the individual online trader. But you need to get some training to understand it, as it moves very fast. You can get into trouble with it if you don't know what you're doing.
With Level II, you see not only the best current price to buy and sell, you are also privy to everything right behind the current prices. You see the "pressure" that is building at various prices, as market makers line up to buy and sell and thus you get a better sense of which direction the stock is moving.
One metaphor that describes this is to say that Level II is like flying an airplane with radar guidance, while Level I is like flying by the seat of your pants, with no radar to indicate direction, force, or turbulence.
But the true picture of what is happening in the game is somewhat more complicated. There is another layer of the action. Level II data, while a tremendous advantage over Level I, is still only a part of the whole picture. This is because even with Level II quotes, you are unable to see the buys and sells that the market markers are doing "behind the curtain."
Although altogether irrelevant for the occasional investor, it is quite relevant for the active trader. I mention it only to indicate one of the ways the individual trader, even with Level II, is at a disadvantage compared to the institutional players.
Level III: The heavy hitters.

Most of the day trader software packages don't include access to the major league where only the heavy hitters are playing, and this layer of the game is taking place on what is called Level III. In this league, the players are trading large amounts of stock to each other on one of the electronic networks, Instinet. And they are doing it for slightly better prices than you will see disseminated on Level II.

The purpose of their using this Level III system is that they are able to buy and sell blocks of stock anonymously. They not only make money on the spread between the bid and the ask that shows up on Level II, they also "scalp" a better price in the stock they buy and sell to each other then the prices that go out to the public. So, they effectively make money two ways. And they do this repeatedly, earning a nice profit along the way.
None of this activity shows up in the Level II screen. It is possible for the individual active trader to passively monitor this Level III activity buy paying $200 per month to the exchange. But the cost to be able to actively trade with live Level III is a cool half million dollars. Welcome to the big league, where membership has its privileges.
The Level II screen has different colors to represent the best price, the next best price, the third best price and so on, both to buy and sell the stock. It identifies the name of each market maker at each price. When the stock is active, the colors change rapidly with each change in price. The colors make it easy for those viewing the screen to quickly assess how fast a stock is moving at each price.
When you watch Level II quotes, it looks something like a fast game of Pac-Man. You see two rows of prices on your screen—one to buy and one to sell a given stock in varying amounts by market makers. As shares are bought by and sold to the public, the lumps of shares are "eaten up," and leave the screen. Each market maker waits in line for his turn to offer his lump of shares to be consumed. So, as each market maker's supply of stock is eaten, the next one in line comes to the head of the line.
But the process is never so orderly.
Because what makes the game exciting is this: At any time, a market maker can jump in ahead of others in line simply by being willing to offer a new best price to buy or sell the stock. Decisions about changes in price by market makers are made very quickly. Remember, this is all being done electronically. There is a lot of quick strategizing that goes on between them in jockeying for position to buy and sell.
Like a game of poker, each player keeps his electronic hand close to his cyber-chest, not wanting any of the others to know his moves until literally the last second. Also like poker, there is a certain amount of bluffing and "head fakes" that take place. All of this makes up the micro-world of determining moment to moment prices. While crucial for the serious active trader, it is but a mere curiosity for the long term investor. They don't really care whether they pay a quarter point more or less, since they have a long-term perspective.

But even for online investors whose style is to buy and hold, it is fascinating and instructive to simply sit and watch a Level II screen to learn how electronic trading actually occurs. You may do this by visiting a day-trading room in your area or by downloading a trial version of software (usually 15 minutes delayed) at sites that offer it (for example, Tradescape.com).
I have found watching Level II data useful in deciphering some of the strategy employed by market makers. You begin to realize how these people are able to manipulate a stock up or down when it is to their advantage. And, of course, it is always to their advantage.
It is because of this perceived (and actual) power to manipulate stock prices that market makers have become the target of scorn and contempt by active traders and serious investors. This may be witnessed by reading a sample of the online bulletin board posts anytime a stock moves unpredictably for reasons that are largely unknown. The first and easiest target for blame are the market makers. Justified or not, in the stock trading world, they are the wretched group that everyone loves to hate.
When watching Level II, it takes awhile to understand the flow patterns of a stock. But after days of close watching, you come away with a pretty clear picture of how things work on the NASDAQ market. You begin to be able to predict which way the market is going to move just by watching the action. This is a tremendous advantage compared to having no idea which way it is going with Level I data. And Level II is electronic trading at its most pure level.
Of course, wallowing in this kind of minutia is not for everybody. You must be willing to narrow your focus to changing colors on a screen without getting bored at watching flashing numbers. I found the flow of numbers captivating, especially as I began to understand more of what they meant.
For those who are more active traders and need to be on a par with other traders, it is crucial to have this information. If you don't, you will be at a huge disadvantage, since most other serious day and swing traders will be monitoring Level II quotes closely.
In the game of day trading or active position trading, you need to have all the data available to compete. You need, in some ways, to think like a long-term investor. You need to know the sector of the company you are trading and the particular stock inside and out. You need to know every bit of news about it, the fundamentals and technicals, and its daily patterns.
You need to become an expert in that one stock and, make it such a part of your psyche that you even dream about it at night! You can be sure the market makers are doing nothing less than this. And if you're going to compete against them, you have to take it as seriously as they do. Anything less, and you are likely to lose your shirt. And even with this dedication, you will still be at least a step behind the big league professionals. If you don't believe this, you are fooling yourself.
Good day traders, in this way, are thinking like long-term investors. They are doing the research they need to do. They are becoming more professional in their approach. We will get into this theme of what "investors-mind" has to offer traders in chapter 9. The days of 20-somethings playing momentum stocks they don't even know the names of are coming to an end. It may work for awhile in a fast market but, over time, the market will rob them of their money and slit their emotional throats.
So trying to compete against the market with anything less than Level II is impossible. Viewing Level II is like being able to see what's coming around the bend before it actually appears. Because you can see how many market makers are lining up at what prices (and with how much stock) to buy and sell, you have a window on exactly which way the stock is headed.
One simple way this information is useful is that I can comfortably put in a market order to buy at a certain price when I see that there is plenty of stock for sale at that price. In other words, I see that there are a number of market makers lined up offering stock at my price.
Otherwise, I have to pay a little more for a limit order (an order to buy the stock only when it reaches a specific limit I have specified), not knowing whether the price I want to pay will still be available by the time my order is processed. But even this is changing, as at least one company is now offering limit orders at $5, the same as for market orders (rjt.com).

Online investors simply don't know where the stock is going to be in a minute without Level II information. And when you're trying to get the best possible prices, a minute into the future translates into a big advantage.
As we become more sophisticated online investors, we will all want the advantage that comes with Level II. When it is offered for very low cost of even free, all serious investors, even those who only trade a few times a year, will want the very best prices in getting in and out of a stock. They will no longer be as tolerant as they are now of giving such a big advantage to the market makers. In this way, longer term investors are going to think more like day traders. In chapter 10, we explore this thoroughly.

The Rush to Increase Trading Hours

For some time now, you can trade after normal market hours. Two online brokerages, Dreyfus and Discover, began the new wave, joining forces with an after hours market site (www.marketxt.com), initiating extended trading for the online investor. And many other online brokerages have jumped in to offer the same. This means that those on the East coast who have accounts can trade from Monday through Thursday from 6-8 p.m.
Perhaps more significantly, those on the West coast can enjoy trading from 3-6 p.m. in the afternoon, during what are still normal afternoon business hours. My prediction: Within no longer than six months after this book is published, some form of trading will be available 24 hours per day.

This new development is important because it means you can trade on news at the close of the market rather than be forced to wait until the next morning. This is one more way the individual online investor gains more equal status to professional traders, who have enjoyed this privilege for some time.
Although there may be some problems related to fair bid and offer spreads (the difference between buy and sell prices are too far apart) and a possible lack of volume in the after-market, these issues will be resolved as more traders and investors become more comfortable with trading outside normal market hours.
And it doesn't stop there. By the time you read this, The NASDAQ market will have extended afternoon hours just to cater to online investors.
If that's not enough, the NASDAQ itself is planning to sell shares of itself to its members, and perhaps later, to the public. What the NASDAQ does will be followed by the New York Exchange—because nobody wants to be left out of the game. Nobody wants to lose the orders that will be put through by individual investors sitting at their own computers. The reason for lengthening trading hours by the exchanges is not only as a convenience to online traders. It's mainly because of the pressure not to lose business to independent electronic trading networks, discussed below.
In this country, we are heading for nothing less than one large electronic stock exchange that will operate around the clock. This may very well mean that the New York Exchange becomes entirely electronic and the floor trading system as we know it will cease to exist. As the news items below indicate, this will ultimately turn into one gigantic worldwide exchange. Every new computer sold will include built-in software that immediately gives you access to this worldwide exchange. Just as we may now connect to Web sites all over the world, the world's markets will offer us the same mouse-click-away convenience. It's all coming right around the bend.
Item: "On November 5, 1999, NASDAQ announced plans to open an internet-based exchange that will list shares of companies based in Europe.

This is part of its effort to build a global stock exchange that offers nonstop securities trading in all parts of the world. They also announced plans to set up a virtual stock exchange in Japan as well. NASDAQ officials hope to begin operations in Europe and Japan in the final three months of 2000" (The New York Times, November 5, 1999, p. C2).
Item: "Under pressure from upstart computerized markets, the New York Stock Exchange plans to break with centuries of tradition by creating its own electronic trading system, Chairman Richard Grasso announced Friday. The proposed system would allow trades of 1000 or fewer shares to be executed automatically, bypassing the "specialists"—traders on the Big Board floor who hold the franchise for dealing in specific NYSE-listed stocks.

The plan is seen by some analysts as a key step toward an eventual all-electronic market. The NYSE has long maintained that its system for filtering all trades through 480 specialists provides better prices and market stability for investors. But critics, including many of the NYSE member broker-dealers, are pushing the Big Board to emulate the competition—namely such quick and low-cost electronic trading networks or ECNs, as Instinet, Island and Primax Trading, which automatically match buyers and sellers with no intermediary involved" (Los Angeles Times, November 6, 1999, p. C1).

The Rush to Offer Alternative Trading Systems

As indicated above, another important development is the ability of individual traders to place trades with independent electronic networks, so that you may be able to eliminate your present brokerage house altogether. These are already commonly used by day trading firms, handling millions of stock trades per day.

These alternative systems line up buy and sell orders from brokerages and match them automatically. This eliminates the role of dealers and stock exchanges. These alternative systems are currently available to a small number of individual investors who pay a lot for the privilege to use them.
These systems have come about because of the new computer technology and customer pressure for low costs and fast trading. They have taken business away from exchanges by offering cheap trade execution during regular market hours and after-hours. It is because of these systems that both the NASDAQ and the New York Exchange have been forced to lengthen their hours of trading.

Before long, these electronic systems will be available to all of us who are trading online. By eliminating the middle man role that your brokerage house plays, you will pay less in commissions and be able to make immediate trades with other traders directly, guaranteeing yourself the best possible prices.
The gold rush has really just begun. Thousands are joining the prospecting game every week. And as a growing number have money to invest, online trading will continue to grow. This is not a passing fad—anymore than the internet itself is. And that leads us to why we need this book—the first to explore the psychology of this exploding phenomenon of online investing.
Why the Psychology of Online Investing?

Some might be wondering what the value is of a book on the psychology of internet trading. Isn't it just as simple as pushing buttons and hoping the trade goes our way? Do we really need to understand how our own thinking and emotions effect our trading habits?
Of course we do!
Without understanding how our thinking and emotions effect our trading behavior, we will tend to unconsciously repeat the same mistakes over and over again.. Whether you are a day trader or a long-term investor, your thinking and emotions will effect your decision-making, your money management, and your overall investment outcomes.
From my perspective as a psychologist, this is obvious. But it is not so obvious to those who have never really considered their own habitual ways of dealing with money. By the time you finish this book, it will be obvious to you, too.
Here are some simple examples: Feeling fearful of making the wrong decision may block us from taking decisive action. Or: The tendency to be overly conservative may make us take profits too quickly on a rising stock.
Or: Not considering carefully enough some of the factors affecting current trading conditions may prompt us to leap prematurely. Any of these things may happen to us occasionally. But it is the repeated mistake that we need to identify and understand, so that we may change our behavior.
Who is The Disciplined Online Investor For?

This book will be most useful for those of you who already know how to push the right keys to trade on the computer. It is for all online traders and investors. It doesn't matter whether you are a "minute trader," who trades dozens of times per day, or just a few times per year.

I will be using the word trading in this book simply to indicate buying or selling a stock—a stock transaction. Online investors then, make trades when they execute a buy or sell, even if they are investing over the long term.
But when we think of the difference between approaches to the market, we need to remember that investing over the longer term is a bet that a company or industry will improve its profitability or market share over time. Trading is a bet a stock will rise or fall in the next ten minutes or other short-term period of time. Investments can lead to real gains for all shareholders as the market rises, while trades require someone to lose a dollar for every dollar you gain.
If you trade online, you will find that the topics I present will be relevant to you. Those who are more active online traders (at least a few times per month or more), and who follow the markets closely, will find that many of the issues will be especially relevant to their trading frequency.
Technical trading strategies, trading systems, and analyzing stock fundamentals will not be our focus. So it is best if you already know how to gather this information. Since there are hundreds of web sites, books and newsletters offering systems and strategies, you should have no problem finding what you are looking for. As a starting point, a comprehensive and well-organized site with links to virtually any topic in the investment arena is www.investormap.com.
As I did above, I will mention a few choice sites along the way that I have found very useful. I will also identify some basic facts about market behavior that everyone needs to be aware of, and how you can use them to your advantage. So some strategic moves, as they relate to psychology, will be considered.
There are also a number of manuals on the mechanical aspects of electronic trading, including the basics of moving around on the computer. Since anyone who is computer-literate can, with some practice, learn the mechanics of online trading, inability to perform the simple tasks should not be an issue. But even here we find emotions come into the picture.
Emotions and the Mistaken Trade

For example, in a "fast market," when stocks are moving very quickly (big, heavily-traded stock are always moving quickly but sometimes they move very quickly during panic buying or selling) and you must execute trades decisively, it is common for some—especially beginners—to get anxious and hit the wrong keys.
From this we get the horror stories of inexperienced traders inserting a price into the trading box different then the one they intended. Or they put in the wrong number of shares, or the wrong type of trade—all of these errors often resulting in frustrating losses. All this just for hitting the wrong keys. I have seen these mistakes occur both with those trying to learn day-trading in professional trading rooms and by individuals trading on their own.
For example, a very experienced trader who teaches beginning traders revealed that he had recently not only hit the wrong key once but then went ahead and did exactly the same thing again! He was used to hitting the "buy" key, as he usually went long on a stock. But this time he was selling it short, that is selling the stock first, hoping it would go down, and then buying it back if it did. Out of habit, he hit the "buy" key and realized that he was supposed to hit the "sell" key, as he was going short. He had 1000 shares of the stock and it was going down quickly!
He again puts in an order for 1000 and again hits the "buy" key, and begins to panic. He had to take one hand and hold the other hand and guide it to the "sell" to bail out of both positions, losing $750 in a matter of seconds. This is a good example of how even the most experienced traders can have a mental lapse, where habit kicks in and they make the wrong costly move.
In the trading rooms, initially it can be quite intimidating just to learn how to use the souped-up computer systems they have available. There is a large amount of data flashing at you continuously and multiple open windows filling every corner of your screen.

Often, you are trying to monitor more than one screen at a time. So, you may have all the data flashing on one main screen in front of you and off to the side will be a smaller screen tracking the S &P futures index. Closely monitoring the futures is common practice by day traders and a good idea, since it gives you a slight jump on which way the stock market is headed.
Of course, it doesn't really give you a jump on other traders, because they are doing the same thing. There is a direct positive correlation between the direction of the futures index and the broader market. This is why some say, if you are a day or minute trader, never to buy a stock unless the futures index is moving up. It is also why one of the first things they teach you at a trading firm is to always keep an eye on the futures index.
In any case, the apprehension that goes with having your money on the line and the need to speedily execute trades, makes it ripe for mistakes to occur. And of course, once the error is made, you have no recourse. If the trade goes through, you have to live with your mistake. Good luck in getting your brokerage firm to make allowances because you pushed the wrong keys!
However, it's not impossible for them to be understanding, and here's a personal example of this. (It helps if you have a long-standing account with your brokerage and at least a modest amount on deposit).
Before I had dynamic (quotes that update continuously by themselves as prices change) real time quotes, I would use my online brokerage to get real-time quotes. The only way I could do this was by entering a trade on an initial screen, getting the quote, and then voiding the trade after previewing it, but before it was actually sent through for execution.

Once, a few minutes before the market closed, I entered a trade for a stock just to get a quote. But I unconsciously pushed the "place trade" button when I meant to push "void." After the market closed, feeling a bit flustered, I called and told the brokerage firm I had made a mistake.
How would they know if I really hit the wrong button by mistake? They wouldn't. Maybe I'm just trying to undo a bad trade that went against me, like so many of the others who must call them and try the same tactic.
Amazingly, they were very understanding, maybe because I had held a retirement account with them for over a decade. They did not charge me a commission for getting out of the trade the next morning. In fact, they allowed me a couple of hours to sell the position when I wanted, and ironically, I actually ended up making a small profit from my accident.
Of course, most who tell stories of mistaken trades are not so fortunate.
This was my one and only "get out of jail free" card. I would not ask them to be understanding like this with me ever again—at least, not on a mistaken trade.
Although most traders at home or at their offices don't have the sophisticated systems of the institutions and professional day trading rooms, still they have to contend with the anxiety of putting their money on the line. In each case, it takes time to get comfortable with the motions of trading.
So, part of containing your emotions while trading is to be able to coordinate your eye-hand movements and your brain without letting anxiety get the best of you. Later, we will look at some tips for preventing this from happening.
The Excitement of Online Trading

If you already trade online, you know the feelings of power and excitement that go with the trading experience. You know how watching your portfolio may become a frequent interest, if not an obsession.
It is likely that you have already decided not to use a full-service broker because of cost. Rather than hand your money over to a broker to manage, you believe you can do just as well or even better yourself.
Perhaps you have been influenced by the numerous ads on financial TV channels that encourage you to take your own financial future into your hands and trade for yourself. These ads have whet your appetite for quick riches through trading. We watch others strike the vein of gold through trading volatile, fast-moving stocks and we want some of the easy money ourselves.
The Disciplined Online Investor is the first book aimed at helping online traders understand their own thoughts and feelings, while they are trading. It will address the psychological forces that affect you, the individual trader, as you sit at your computer and go through the process of making a trade. And it will help you gain insight into the psychology of the market, so that you may better understand, predict, and anticipate the moves of others.
"Mind Moves the Market"

From my perspective, it is not the economy, interest rates, company earnings, stock stories, business cycles, political maneuverings, astrologic, atmospheric, or seasonal influences that dictate the ups and downs of the market. While some or all of these factors definitely play a part in short, medium, and long term market swings, they are not the most basic ingredient.
The most crucial factor is this: How individual and institutional traders interpret all of these different forces in the various markets and their actions based on their interpretations.
This is what determines why a change in a company's future prospects, a change in Fed Fund rates, a change in earnings, a stock split—or any number of other small or large changes— are (or are not) taken seriously. When what traders tell themselves about these events changes quickly and drastically, you can bet that the market will move with these perceptions.
The answer, then, to the question as to why we must value psychology is simple. We value the psychology of you, the individual trader, and the psychology of the "market" (or the mass of other traders) because it is psychology which shapes and moves the market. This is why understanding our own thoughts and feelings while trading online and having some sense of the psychology of others is so important.
Again: Psychology is the most powerful force that moves markets. My shortcut, sound-bite way to say this is: "Mind moves the market."
It is our belief about what is happening right now that shapes our immediate actions, not necessarily what is actually happening.
And it is how we imagine the future will be (based on the past and the present) that also shapes our actions—not necessarily how the future actually turns out to be.
Defining the Topics

We will look at the following basic psychological issues that are relevant to online traders:

Identifying what type of investor you are. Do you have the personality type and temperament that can tolerate watching market swings very closely? What is your approach to online trading? How frequently and with what scope do you want to trade?
Balancing the opposite emotions of greed (reaching out, risk-taking, letting gains run) and fear (withdrawing or staying neutral, defensive, taking profits, cutting losses). Finding the balance that is right for you.
Balancing the isolation of trading on your own at home or the office with the large amount of information available through the media. How to trust your own analysis when so many sources of information want to shape your opinion and your actions? How to use the available information without becoming overwhelmed by it.
Balancing active and yielding forms of self-control, and understanding how to apply each of them, according to your needs and the market conditions.
Confronting the fear of taking decisive action; dealing with trader's block. Or: "Don't just sit there, do something!"
Confronting the fear of doing nothing. Knowing when it's time to sit back and watch, taking no action. Or: "Don't just do something, sit there!"
Balancing short, medium, and long term thinking and developing a frame of reference to understand your own trading moves.
Understanding the concepts of how sort-term traders can learn from some of the thinking of long term investors and, conversely, how long-term investors can learn from some of the thinking and tools of short-term traders.
An overall investing philosophy that allows for the ups and downs in the market and your own portfolio. How to manage catastrophic, "all or nothing" thinking when it comes to your trading fortunes.

Defining the Approach

Our approach to the issues we will focus on will be one of balancing opposites. We will not assume there is just one right answer to solve a problem or one right stance to take each time the same problem arises. Instead, we will adopt a balanced way of thinking that allows us to respond to each new situation in a flexible manner. We will assume that being right will be defined by the particular situation in which we find ourselves.
In fact, it is the tendency to do the same thing repeatedly, no matter what the situation calls for, that gets us in trouble when trading. It accounts for many of the habitual conscious and unconscious choices we make that lead to bad trades.
For example, let's say you are a position trader (or speculator) who likes to hold a stock for a few hours, days, weeks, or even months and then capitalize on a special situation. (This, by the way, is my own style of trading, combined with some long-term holds).
Your thinking is not the same as the day trader, who does not care about these situations except as they relate to the minute to minute momentum of the stock. Nor do you necessarily care about the long term fate of the stock like the buy and hold investor. Instead, you want to take advantage of a specific event related to the stock.

Maybe there is stock split coming. Or news about the company that you believe will make the stock jump. If you are not very trusting of making your own decision about whether to buy this stock, you may find that you are on the stock bulletin boards, seeking confirmation from others that your thinking is correct.
Some who are unsure of their own thinking have great difficulty making the decision to buy without this confirmation from others. They become quite dependent on it. And often, they are trusting the opinion of people who they don't even know and whom may not know any more about the stock than they do.
They are not be able to trust their own due diligence, and then make up their mind as to how to proceed. This inability to trust one's own judgment can make for arbitrary decisions, unreasonable risk-taking, or becoming paralyzed and unable to take action in a timely manner. And it may happen again and again.
So, a particular personality weakness, in this case the inability to trust your own analysis, judgment and decision-making, forces you to seek the approval of others before taking action. And yet you may not actually realize this is what you are doing!
Here's another example. If you happen to have the kind of heavy risk-taking personality that likes to always be in the action, you will tend to error on the side of making too many trades. You will go about your merry way as a day trader without any awareness that being in the action and feeling the flow of adrenaline rushing through your body is what the trading is all about for you.
Yes, you will say you are doing it to make some money. And consciously, that is true. But the thrill is in making the trade, and it is this which unconsciously pulls you. If you have no awareness that this tendency is operating, you will make hundreds of trades and often have little or nothing to show for it. In fact, it is clear from studies that track the trading records of day traders that the greater percentage lose a good deal of their initial stake. And they lose not only their initial stake, but continue to lose even as they become more experienced.
For example, a study just released by the North American Securities Administrators Association concluded that only eleven percent of All-Tech traders (a large day trading firm) make money consistently.
My point is that you need to know something about your own personality tendencies and how they affect your trading behavior. So, with this in mind, let's now turn to some broad types of investing and the personalities that go with them.