Taking the Bait

  • Posted by
  • on June 2nd, 2011

One of my favorite quotes for trading is “the second mouse gets the cheese”.  It’s a simple reminder to avoid the temptation of acting on the first piece of evidence I see.  I generally believe it to be true, unless your business model is HFT there is no need to be the first bidder.

There is a hidden risk, however, of not taking the bait.  What if the first mouse nibbles but doesn’t get snapped?  Does that mean it’s safe to fight him for that cheese?  It’s quite possible that the trap is busted, and he will get away with a full belly and no damage done.  As a detached lab operator, one may think “Boy, did he get lucky”.  As a hungry mouse, you might think “Damn, I’m getting over there before it’s gone!”

This is totally how I felt on Tuesday afternoon.  I missed the lows last week waiting for more evidence, which was fine for day 1 and day 2.  Once day 3 arrived and I hadn’t done anything to take advantage of that dip, it got to me a little.  The gap up on the Greece news was fine, news can come out of nowhere and smack us around…but it faded so no big deal, right?  Until it stopped fading, and screamed higher into the bell.  At that point I became a believer.

I never did anything with this “belief”, but it completely colored my prep Tuesday night.  Instead of my usual balanced look at the long and short side, I focused way too much time on long setups after ignoring them from lower prices.  Look hard enough, and you can find evidence for any belief you have no matter the idiocy.  I had to look hard but working down the quality scale I found some names with potential like $BRCD & $WEN.

Thankfully, evidence of motivated sellers came early enough in Wednesday’s session that it was easy to stay away from buying.  But that fear of missing the upturn was ingrained enough that I took off a chunk of my $IWM puts into the lunch hour, obviously not the right move.  They had been ruining my longs in recent days, so of course I couldn’t wait to sell the first real uptick.

I’m not a believer in the “greed” idea; the great motivator is FEAR.  Fear of loss, fear of missing out, and fear of looking stupid are very natural feelings of which we should not be ashamed.  Letting them drive our actions is where the problem lies.  I felt the fear of missing out, which turned into a feeling of discomfort, which did not result in panic but did blind me with a bias for Wednesday.  Eliminating fear and stupidity sounds like a great goal, but let’s get real…my daily checkup is needed because those traits run deep and markets serve as a magnifying glass for the emotions of a trader.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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