Except for the self-destructive personalities who are attracted to the markets, Charlie believed most new traders had good instincts but soon lost them in the fear-and-greed market paradigm. He once advised me, “Humans have basically excellent instincts. We have to, because our brains are still so poorly developed from an evolutionary perspective.”
One of the old-time adages I heard when I began trading in the 1970s was “Run fast or not at all!” I haven’t heard it for many years now, but it is excellent advice and plays to those basic good instincts traders possess.
Generally, this pertains to getting out of a position, but in some instances it could be relevant for entering. This all assumes that, ceteris paribus, your decision is at least in a general sense within the framework of your trading method.
A 2008 Example
A good friend of mine held a substantial position in the stock of the company for which he worked. He’d been accumulating it for nearly 20 years and its value was a little over one million dollars, a great start on retirement. Then came the financial and stock market meltdown of 2008. His stock broke sharply, about 10%, and he told me his first instinct was to liquidate most of it because he “smelled bigger trouble.” But then: “I’m not retiring for 10 years, I can wait it out!”
His stock continued to fall. He was going to sell. He was going to stay. He was going to sell. He was frozen, and he missed the opportunity to go with his basic instinct. After another big hit on the stock one morning he finally could not take it and sold 75% of his holdings, two days before the bottom.
The first mistake (not selling at the first sign of trouble) is usually not fatal, but the second mistake (selling at the bottom) is the one that will hurt you. Once he missed his shot, he should have held tight, sat on his hands and ridden it out. Over the next five years the stock recovered 100% and even moved higher.
50YearTrader Tip: Chart Your Emotions
Keep a simple chart of your emotions. A “1” is being so upset you are going to quit trading, and a “10” is “Watch out, Warren Buffett, here I come” or googling “Ferraris for sale near me.” Be careful of making critical decisions above eight and below three. Where were your emotions when you made a good trade? A bad trade?
This post is educational commentary. It is not investment advice. Trading futures and FX involves substantial risk of loss.
Good Trading!
Michael Duane Archer
Related Reading
- Getting Married to a Trade: Position Size and Your Equity Line
- Three Charlie Goodman Stories and the Trading Lessons in Each
- Goodmanisms: Charlie Goodman’s Sayings on Trading, Explained
Keep Learning the Goodman Way
If this article was useful, these are the next steps:
- The Method: propagation, intersection and the 3-C Principle, drawn plate by plate.
- The Goodman Library: the books, from Goodman for Grasshoppers to The Goodman 6 & 6.
- The Trader’s Playbook: the Molokai setup in one printed, numbered volume.
- Mentoring: work one-on-one with the authors.