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Ep 97: Proper Thinking When You Trade Stocks

August 11th, 2016

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Hey this is Sasha Evdakov and welcome to another episode of let’s talk stock, episode 97.

In this episode I’d like to share with you a very important concept, a very important action for you to be successful in trading. It is one of the more important things that you need to do in order to be successful and it is a very simple concept but it is very difficult to do. And that concept is proper thinking but more importantly it’s all about thinking.

Back when I was studying a lot of business development, a lot of personal growth, reading al lot of books, watching a lot of video courses, attending a bunch of seminars and I was doing a lot of growth, a lot of educational growth process in my life, I hear this concept from Brian Tracy in one of the business development courses. I still read lot of books and a lot of video courses and I still continue to grow that education side, but I did a lot more of it back then and that’s really were a lot of the puzzle pieces started to fit together for me. When I heard this concept about of thinking it started to put more and more puzzle pieces for me together.

What happens with thinking is, once you have the appropriate thinking process, this allows you to have better choices. You’re thinking about the better choices that are coming your way. After the choices, it allows you to do better actions and when you have better actions, you take the actions on those steps, you have better results.
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The proper thinking process

Let’s take a look at this. If you go through the process of thinking properly and having the right thought process you then go ahead and make decisions and make choices about taking action on those steps. If I am thinking about a certain stock, researching a stock like apple, home depot, twitter, Facebook, whatever the stock is. I start thinking about those choices, then it allows me to take better action.

From the choices I can go in and I can create actions and then from the actions I can create better results. As I’m thinking about the actions I am looking at what are the actions steps that I need to do? What are the appropriate steps that I need to go through? and from those appropriate steps comes the results. If I take the right actions I can get the results. All of this really works through a process, going from thinking, all the way to going and getting your results.

When I look at the thought process in the stock market, just like with anything else, there is two main places or to ways that you could think about something. They are in the positive emotions or, of course, the negative emotions. You have these two ways that you could think about something. The thought process of course you could have positive or negative but in the stock market it happens differently depending on your situation because what I want to share with you is what is applicable.

What happens in the market, is you have a situation where you’re between this positive and negative states. You have a situation where you are either out of a position our you are in a position. This would be your position of where you are at the moment. You are either out of the position, this would be like sitting on the sidelines or you are in a position, you are inside a trade. Hopefully that makes a little sense.
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Now what you can do is you start looking at what is your thinking process during these times. It’s important to really have the right thinking process because as I’ve just explained, you start creating choices, you start making decisions and those choices lead to certain actions and those actions are the results and these are the things that you want, this is ultimately what most people want when they are trading the stock market, they want the results. But you have to go through the appropriate choices and you have to have the right actions to get to the results.

Being out of a position

When you are looking at the positions and you are out of a position, there is a few thought processes that go through your mind. You start looking at what’s moving. You start thinking about the conditions of the market. You might actually also look at your profit potential: How much can you make so that you could buy that next thing? or what is it that you need to save for? So you look at profit potential: What’s moving the conditions of the market?

You will probably start wondering looking at stocks and then about your time. Time meaning: When you should get in? When should you purchase a certain stock? When should you execute the trade, should you do it during the day, during the afternoon, maybe tomorrow? and then you’ll look back and you’ll say what does the market look like? what is moving? are there other things that are moving?

This is the thought process that you look at and a lot of people look at. This is what I used to look at a lot more when I got into the market, it was a lot of things like this: what is moving? the conditions, the profits, the stocks and then the time: when to get in and so forth because I am sitting out. I am sitting on the sidelines and I have this bucket full of cash ready to invest because I’m looking to take my money and either duplicate it, quadruple it and make a certain percentage on that money. That is what I’m looking to do. When you are sitting on the sidelines you are starting to think about these things.

Being in a position

On the flip side, when you are in a trade you start looking at some other things. You start looking at some other behaviors that happen within that stock because you’re already in the trade. In this case you might be thinking again: how is it moving? Is your stock moving up? How much energy is there? How is the market overall? Again the market conditions. But you also start thinking about things like: should I take my profits early? you start looking at reduction and then you start looking at your current profits: is your current profits enough? Then you start wondering about: when is the pullback going to come or happen? and then this later gets to a little bit more risk and then you might also think about should you add to the position?
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All these different thoughts might be running through your head throughout the position. So if you are out of the position, you have these kind of thought process that will go on, from moving, how is it moving? the conditions, the profit of your potential, the stocks, when to get in? what type of stocks? And the time frame you should get in, how long you should hold it? and then when you are actually in the position you are kind of looking at similar things but they are slightly different. Now you are watching at how things are moving because you are tied to the stock, the energy, again the market conditions are still safe on that spectrum, should you take some profits? should you reduce your position? when should you take your profits? and when should you maybe add to the position, should you add on a pull back?

You’ll slowly have positive and negative emotions that go in both of these. Positive emotions for the time that you are out and in and again the same thing for when you have negative emotions, when you are in and also out.
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For example, positive emotions when you are out, if you are not in a trade, if you are out of a trade and that stocks starts selling off completely and you wanted to get in, you are going to say: I did really well, I am glad I sat out. You are looking to confirming your bias, trying to cope with the thinking process that you were correct and then when you are in a positions and things move in your favor, again you are saying: Wow, I made a good choice. You’re confirming why it is that you are in there and you have this positive emotion.

The inverse is true on a negative emotion spectrum, when you are in a position and the stock goes against you, you are going to have that negative emotion because it’s going against you, you made the incorrect decision or things are not working out in your favor. Then you might have a negative emotion when you are out of a trade because maybe it’s moving but you are not in it, so you are missing out.

There are all these emotions that start playing, and there are of course more emotions that go along with trading, but just to share with you about the thinking process, that how complicated we make this thought process is we go through all of this and we try to make a trading decision. Not to mention the other things that we start adding into this, when we are sitting out, we start adding in things like moving averages, we look at volume, we look at Bollinger bands, you might look at other patters or technical analysis, support and then you have resistance and all of kinds of stuff. You start adding in all these functions and your thinking process now has to compute all of this before you even get into a position. It makes it very difficult. For me, I like to simplify thigs.

What is the risk?

Here is the way I look at things and I like to make things as simple as possible. Here is the way I look at it when I am getting into a trade and the way I think about it. if I am out and I am thinking about a position. Let’s just say I am looking to set up a trade and I am looking to use my money to invest it to make more money. What do I do? What do I look at? I ask myself one simple thing and that is: what is the risk? That is what I ask myself. What is the risk? and if you have trouble figuring this out, what you can do is, do it on a spectrum. You could say this over here is low risk and this here is high risk.
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If for example, let’s say this is your normal or average trading size or position, you normally trade 1000 shares, and the risk is high. If the risk is high, if it’s somewhere over here in the middle, I might trade 700 shares. So I am trading littler. If it is really high, but I still like the position and I think it might have potential, I might trade only 300 shares. Then, if it is extremely high I probably wouldn’t even trade it but let’s just say if you really wanted to get in and if it still meets all of your guidelines, you might trade 100 shares or something like that. So you trade less when the risk is high.

Then, if the risk is low and you normally trade 1000 shares. Let’s just say that is your average, that is your equilibrium, you are looking at it and you are trading 1000 shares. Now, if the risk is a little bit lower you might do 1200 shares, 1400 shares or 1600 shares.

You don’t go too wild or crazy because what you don’t want to do is be off balance between the difference when you are getting into high trades and low trades. Your kind of want those a little bit balanced. You probably wouldn’t want to exceed maybe 1500 here and a 500 drop over here, because then your max range is minus 500 here and plus 500 on this side. You don’t want to go too far in one spectrum or the other.
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What you are trying to assess, and my question always when I’m thinking, and it makes things a lot simpler is, if I am not in the trade, I just simply ask myself: what’s the risk? and if I can do a risk to reward ratio, where 3 to 1 is my win rate to the risk. for example, if the stock is moving and I project it and let’s just say it’s an A to B to C to D pattern, just a basic pattern. If I project the risk to do the C to D and it is 3 times larger than the risk which is over here 1, then that is worth it.

If it’s more of a 4 to 1 or a 5 to 1 or a 6 to 1, then I think of it even better because now I say: ok then the risk is a little bit lower or the reward is a little higher so then I have a little more potential and then I might load a little more shares on there.

Again you have to assess this thing and my thinking process is always: what is the risk? Now this of course, is after I’ve done the technical analysis, after I have looked at the company, after I’ve evaluated the charts. Now, my only thinking is: what is the risk? And that is always in my mind.

I used to think about: what is my profit potential? then I used to think about how are the moving averages going? but once I found myself already kind of attached to a certain stock, you’ve already kind of decided that you are going to invest in it and you have to slowly be aware of yourself when you get into that point. It is kind of like when you starting researching about a phone and you say: Oh, I like this phone, I like this device or this gadget, then you start researching it and you read reviews about it and then you slowly get confirmation bias of it, where it reassures you that that’s the right purchase and then eventually you get it.

So, already in my mind by the time I am looking at that stock for a few moments, I make the decision probably within a couple of minutes, within a minute or two. After I am looking at the stock chart, looking and evaluating, because I already know how they move, react and behave, now I’m just looking at what is the risk? and that is my biggest question and that is all I am thinking about and if that passes my test then I might get into the trade right there. Now I am in the trade.

Is the position healthy?

When you are in the trade: what is it that I am thinking about? what is my thought process? Now you know and understand that you’ll probably have some position, it will pull back a little bit, sometimes they don’t work in your favor and you have that positive and negative emotions, sometimes it goes up and you have positive emotions, sometimes they go down and you get negative emotions. So what am I thinking about when I am in the trade?
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Again, I ask myself really one main question and this is what I am always thinking about and it just keeps things simple. That way my brain doesn’t do this ping pong factor or ping pong thing, like pong goes back and forth and back. Do you ever have those thoughts where you have one though, the butterfly effect, and then one thought leads to the next thought, then you lead to another thought. It’s kind of like day dreaming but it just continues to go in circles and really in the end it kind of creates this tornado effect where you start thinking about negative thoughts and that is really what I try to avoid.

When I am in a trade I’m always asking myself, there is one question, and I think: is the position healthy? That is pretty much the only thing that I think about. This allows me to keep my sanity because once I’m in the position, I am going to get positive emotions and I am going to get some negative emotions. Sometimes that account value, let’s just say you had a $10000 account value, sometimes that drops to $9900. Now you’re still in a position to ask yourself: is the position healthy?

Otherwise, if you think about this money that is in your account, that liquidation value, you are going to drive yourself insane. Your thinking process is going to make you think about the choices, you are going to think and wonder: what if it goes against me? what if it doesn’t work? what if I lose this money? Then it’s going to lead you to worry and once you worry, you are going to create this action that you want to get out of it early, and when you get out of it early, your results are going to suffer. So now you take this account dive minus $100, then that stock moves back up and now all of a sudden you have this other emotion of chasing it because you missed out. So that is the thing, I always ask myself: is the position healthy?

With this I look at a few factors, I look at how it is moving and of course the action of the price and how the stock is behaving. It basically comes down to BAM: B – A – M, the behavior, the action and how things are moving. And all this comes from price and volume.

If the price is moving at a nice price spread. You have a price spread that is large rather than a price spread that is small, that to me is good behavior. If you have a small price spread is kind of a weaker behavior. Then if you have volume coming in with it, that’s also great. If you have light volume, that is not as good.
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It’s all about thinking

I am watching these things and how those things evolve, but my main key, the question I ask myself, is the position healthy? and that is when I am in the positon. If I’m out of the position I look at: what is my risk? What is the risk that’s involved in putting on a trade? Because the act of trading, most of the time you spend in trading, is thinking. It’s all about thinking. You are thinking about moving averages, you are thinking about the charts, you are studying, you are reaching, it all comes down to thinking, analyzing and then evaluating. You make the choices, do the actions and get the results, but it all starts with that thinking process.

The rest of time when I am actually in the trade or when I am out of a trade, I actually have a lot of free time. I have a lot of free time, that I could spend my time doing other things, because once you are in the trade, you are just letting your money sit and either grow, or let options deteriorate or if you’re shorting something you are allowing it to sink. You are being patient and being patient is one of those factors.

And sometimes if you are sitting in a trade for three weeks at a time, then what do you do with the rest of that time? You are thinking about the next trade, the next one that is coming up or you are thinking about when you are in that trade if the positon is healthy. But really the actions that you are doing are minimal so that allows you to have free time,
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For me it’s one the reason why I have an opportunity to do videos and educational lessons like this one or write books. It’s because your money is simply sitting there in these positions, or you are out of the positions, you are doing your research and then potentially you are waiting and being patient to allow those charts to set up. But the act of trading, to put on a trade really just takes 2 to 3 seconds. The rest of the time is that thinking process. So If you find yourself spinning around in this tornado factor, going in the butterfly effect, going from one thing to the next thing, to the third thing to the fourth thing, you’re constantly wondering about your decision. Simplify it.

Think about one thing at a time

You may not use exactly what it is that I think about. It is up to you, if you want to use it, by all means use it. But if for you there is a better solution that you can think of about, just one thing or one simple thing, then focus on that because the rest of it is going to drive you insane. You are going to contradict yourself, you are going to wonder, you are going to be positive and then negative, you are going to feel upset then you are going to feel really happy. Think about one thing, one main focus and ask yourself more of a logical question that you can answer in a way mathematically.

What is the risk? for me is more of a mathematical kind of question, so it’s a 3 to 1 risk to reward ratio or is it a high risk, medium risk or low risk? So again, I can define that risk, you have to define that risk. That is the way I do it. I am looking at the risk where is it healthy, where is it not.

Then once you are in the trade, the position: is the positon healthy? is it moving, acting, behaving? B-A-M. If it’s acting the appropriate way, then you are in a healthy position and you can stop worrying about this $100 pull back. Even if it goes $500 pull back and it starts to make you worry but everything else is fine, then you are not thinking about the right things. You are worrying about your loss, you are thinking about your loss, which eventually creates new decisions, then new actions, you get out early, and that suffers your account and creates negative results.

Find what works for you

Find what works for you and simplify it about when you are in the trade and when you are out of the trade for your thinking process. Because what you don’t want to happen is to have that butterfly effect where is just constantly all over the place, you are worrying, you are wondering: Sasha what do you think about this stock? what do you think about that stock? where is the support? Where is the resistance? If you are emailing me about a trade, then you are not thinking properly, then you haven’t created a plan, then you haven’t set up your strategy and that is typically where people struggle, because of that thinking process. They haven set up the right things in place to focus in the appropriate things.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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