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Trading Against Your Pain Level

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Jeff Clark explains how, in a difficult market, rising emotions can be a great contrarian indicator

Emotion is a trader's worst enemy - but viewed correctly, it can actually be your best friend.
 
The problem, of course, is most traders let their emotions rule their actions. They buy when they're feeling euphoric -- and they sell when they're scared to death.
 
Successful traders do the exact opposite.
 
Of course, we've all heard we should consider buying stocks when there's "blood in the streets." Correspondingly, a great time to sell can be when everyone else is rushing in to buy. The trick to getting it right is to know how to recognize your own emotions, consider the facts of the situation, then do the opposite of what those emotions are telling you to do.
 
It isn't easy. I've been trading stocks for almost 30 years, and I still struggle with trading on my emotions – especially when the stock market behaves as it has over the past couple weeks.
 
But I think I've finally figured it out. The answer came to me when I was visiting my friend Dan in the hospital last weekend.
 
Dan was in really good spirits, considering he just had quadruple bypass surgery. "It's the drugs," he confessed. "Every time it gets too painful, I just point to the chart over there and the nurse ups my dosage." Dan gestured toward a laminated picture of the pain chart.
 
You've probably seen it before. It's a picture of a series of faces that range from happy to sad. Its design helps improve communication between hospital patients and their caregivers. Here's what it looks like:


"How are you feeling?" the nurse will ask.
 
You just point to the face that best represents your pain level, and the nurse drugs you up accordingly. It's a remarkably simple way to make sure we get the right amount of medicine. If you're uncomfortable, you just point to one of the frowny faces on the chart and the nurse increases your dosage. On the other hand, if you're giddy beyond belief and you point to the super-grin smiley face, the nurse can cut you off completely.
 
We should use a similar chart for investors.
 
Think about it... What better way is there to gauge your proper exposure to the stock market?
 
Once again, often the ideal time to buy stocks is when there's panic... when investors are suffering the most pain. And most of us know it may be time to sell when Mom and Pop Public are grinning ear to ear because of the huge gains in their stock portfolio.
 
A financial advisor could instruct any client, "Please point to the face on the chart that best represents how you feel about the stock market right now." If the client points to a frowny face, the advisor knows it's a good time to increase that client's dosage of stocks.
 
On the other hand, if the client points to one of the happy faces, the advisor knows it's time to cut back on the dosage.
 
Now that the S&P has fallen for at least seven out of eight days, I'd bet most investors out there would count themselves an eight or 10. Please adjust your pain medication accordingly... and consider buying stocks.
 
Best regards and good trading,
Jeff Clark
Growth Stock Wire
TradeKing All-Star Commentator


Editor's note: Veteran trader Jeff Clark is author of Growth Stock Wire, a daily read providing investors with a pre-market briefing on opportunities in the global stock, currency, and commodity markets.  Click here for more information… and a free report designed to hone your trading strategies.

Jeff Clark / Growth Stock Wire holds no positions in any securities mentioned in this post.
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