Every week the “Merry Band of Traders” and I wander out of the safe and secluded confines of Sherwood to wreak a little havoc on the Sheriff of Nottingham. While we’re out here, I always take the opportunity to offer up my opinion on a variety of topics.

Last week, I suggested a few things that “Reckless Rhonda” could do to become a better trader. Today, I am continuing my commentary on trading personalities with a look at “Fearful Freddie”. Let’s do an “instant replay “on Freddie. He knows every metric known to man regarding any stock you want to talk about. He can discourse on the “hot sectors” and all of the stocks in the news. Freddie is encyclopedic in his knowledge; trouble is, he is a miserable trader. Freddie is afflicted with “analysis paralysis”. However, Freddie occasionally catches a winner but he gets so nervous when he is on the right side of the trade that he doesn’t want to go home a loser so he cuts his winners short. He simply does not give the trade time to work. That mindset completes the self fulfilling prophecy that he is a loser and as a result, he is a loser. Freddie knows a ton about fundamentals, technical analysis and trade strategies, he just can’t execute. However, he has been a tremendous resource to others; he just can’t seem to do it himself.

The two emotions that will decimate a trading career are Fear and Greed. Freddie is fear’s poster child. He epitomizes the fearful trader. So why is Freddie so fearful? He’s been burned before and has felt the sting of defeat. Why does he continue to trade? Well, he has all of this knowledge about the market and trading, so much so that his peers regularly seek him out for advice. It would be a shame to waste all of that. In the meantime, his trading account is shrinking steadily.

Fear emanates from not knowing what the future holds and being unsure of outcomes. If you are informed of the possible outcomes, then fear diminishes. One who is confident of possible outcomes will be trading with little or no stress. Unproductive emotions are disarmed and your path is well defined and known. Freddie is regularly “shaken out” of positions. Freddie regretfully witnessed many of his hasty and fearful exits turn into winning trades. The “smart money” crowd has preyed upon the likes of Freddie. Is there any hope for Freddie!? The answer is a resounding YES!

My prescription for Freddie is

1) Begin with prudent money management and strategy diversification.

2) Test the waters with small positions and defined risk trades.

A good example would be a high probability out-of-the-money credit spread like a bull put. This position incorporates selling a put comfortably away from price action and limiting risk by purchasing a put below the short put in the same expiration month. The trade should be placed in the current month or the next month out in order to take advantage of time-decay. The bull put has a defined reward (the credit) and a defined risk (the difference in the strike prices minus the credit). The bull put credit spread can make money if the stock goes up, remains neutral or even if it goes down a little. The position does not require constant vigilance. This is “end of the day” trading so Freddie does not have to watch the computer all day and get sick to his stomach on every tick of a one minute chart. Therefore, we have to a great degree removed directional trading from the picture. The trade can be structured with a high probability of success and with a defined exit.

Now Freddie is less fearful because we have removed the unknown. He knows his reward (the credit). He knows his risk as defined earlier and he knows his exit. The market defines his exit on options expiration day, the Saturday after the third Friday of the month. The trade can be very mechanical in its execution with very little left to discretion and emotion. However, what if the stock were to go dramatically bearish? OH NO!! Freddie is “pitching his cookies” What do we do now!! “The Merry Band of Traders” AKA www.MarketTamer.com, has a quiver full of arrows (adjustments) for Freddie so he can modify this trade or any trade for that matter to stay on the winning side of the market while eliminating Fear and Greed. We’re launching September 1^st, so drop by and pay us a visit.

Well, Lady Marian just pinged me on my Blackberry and she wants to grab a burger and fries, so I’ve got to go. They just opened a new “Red Robin” on the edge of Sherwood so we’re going to give it a go. “The Merry Band of Traders” and I will see you next week.

Robin

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