Emotional Trading Destroys | Podcast Episode #465

Emotional trading will destroy one’s portfolio. Aiming to hit home runs with every trade is a sure sign that the trader is overly emotional and only cares about fast money. In this podcast episode Ryan explains how chasing after stocks like MicroStrategy (MSTR) without a plan for managing the risk can ultimately ruin a trader’s attempt at being a successful swing-trader.

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Episode Transcript

Hey everybody, this is Ryan Mallory with shareplanner.com, Swing Trade in the Stock Market.

In today’s episode, we’re going to talk about how emotional trading destroys one’s portfolio. And let’s be honest, when it comes to emotional trading, it’s self-inflicted. We are emotional traders.

When we have something that is out of alignment, out of sync with how we should be trading, that’s often times with position sizes that can be with the types of stocks that we’re trading, the volatility that we can’t emotionally control ourselves with the beta of the stocks.

I mean, we have to be careful and what we’re trading because from a psychological standpoint, it can be very, very destructive and ultimately destructive towards our finances as well. Today’s episode comes from a guy, I’m going to call him George Costanza. That’s the long name, the short name, just George obviously after the Seinfeld character, because it was a very emotional character in that show.

I mean, he was, he was pretty much the central emotional character in that entire TV series.

So George writes:

Dear Ryan, I have lost a lot of money trying to trade terrible assets. I feel quite numb to it now. When the trade doesn’t go in my favor and cut my losses like you preach, I find myself currently writing MSTR since the beginning of this year.

We’re going back to 2024. I let it run because it looked incredibly bullish. I’m used to large volatility but I’m not used to winning. The higher it goes, the more I question my life. Almost like I did when I first started and was holding on to losers. Is there a way I can still ride the way without being so emotional?

I never expected myself to not be able to win due to emotion, but if I don’t handle it, I’m going to end up losing money on this trade. I can feel it.

Thanks, George.

Holy cow, I get it. I’ve I’ve been in those situations before where you’ve you’ve had so many losing trades in a row and then all of a sudden you get into a winning trade, you’re like, I’m going to blow this one.

I know it’s just going to I can’t take it serious. The winning at least. And so you expect to lose and then often times it becomes a self fulfilling prophecy because we ultimately do things that lead to destructive tendencies in our trading. So much of what new traders or undisciplined traders are doing and they’re trading, the reason why they’re they’re losing so much is because they’re very self-destructive.

Maybe not in life in general, though that could be the case too. But also, but just really in their trading, because the stock market does things to us that makes us do and react in ways that are against our best interest and we don’t even realize it.

For instance, doubling down. You have a losing trade. You say to yourself, well, if I double down here, I can lower my my buying cost or my buying price significantly, so I’m going to double down here. And then what happens, though, is what you don’t realize is that you’re doubling your risks.

Yeah, you might have lowered your entry price, but your position size just doubled in size. So we’re, we’re putting ourselves into situations that we can’t ultimately succeed and, or if we succeed in that time, we’re going to do the same thing again because it worked the last time, right?

I’m sure if you’ve been trained for any length of time, you’ve done something because that worked for you the previous time that you did it. I’ve done it 100%. I’ve done it. And So what the market’s going to do, it’s going to lull you into this false sense of security and you’re going to do it and then you’re going to fail. Well, then let’s say you, you, you do the position size where you’re doubling, doubling down.

OK, you have a losing trade. You get into it at $100 a share. Stock ABC, it goes down to $70.00. You’re sitting on a 30% loss. That’s way more than what you bargain for. You can’t afford to take it. So what you do is you double down, great. Now you double down at 70.

Your stop loss or your break even price is probably around $85. You got more shares by getting in at 70. So it’s probably a little bit less than 85. Now if it works out, let’s say it goes back to 85 and let’s say it goes up to $9095.

You cash out, you’re like you’re going to start telling yourself you’re a good trader. Guarantee, even though it’s the most undisciplined approach to trading, you’re going to tell yourself you’re a good trader and then what are you going to do the next time you get into stock ABC and it goes down to seventy, 100% guarantee. You’re going to go ahead and double down because it worked for you last time and then it’s going to go down to $60.00.

And then you, let’s say, let’s say you’re disciplined at this point and say I can’t take it anymore. This is way too much and losses because I doubled down and that second lot has gone from 70 now down to 60. The original went from 100 down to 60 as well. I’m out. OK, But then you get back into it again, let’s say again at $100 and it goes down to 70.

What are you going to do? Well, I was right 50% of the time. Maybe it’ll work again this time I would. So you do it and then all of a sudden you lose more money. That’s how the market destroys you. It it gives you a false sense of security. It makes you think that you better, you’re better than you are. One of the best things that we can do. And George ain’t ultimately wrong here for saying, hey, I I just can feel it that it’s going to go against me.

I know that from an emotional standpoint, that’s probably not the best approach. But what I always tell people when I go into every one of my trades, I plan to lose. I plan to lose and I plan. I expect to lose and I plan accordingly. So does that sound like the the fulfillment of the American dream?

Expect to lose? No, it doesn’t. But I expect to lose and I plan accordingly. Why? Because I know if I don’t take the trade serious, let’s say I go into the trade like I know I’m going to win on this one, I’m probably not going to really worry about the risk aspect.

But if I go into it expecting to lose, I’m going to plan out it because I want to limit my loss exposure. Now granted, I don’t, I don’t lose all the time. I do have my share of losing trades. But what separates me from other traders is the fact that I do manage the risk, that I keep the risk tight.

And so when I’m going through a difficult period of time in my trading, I’m going to be able to weather those, those periods of difficult trading because I’m managing the risk. I’ll be taking 2 or 3% losses where other people will be taking 30 or 40% losses.

I’ll be getting out early so that I can allocate my capital to something that provides a better opportunity going forward. Now, in the case of George, he’s an MSTR. There’s a reason why he’s feeling emotional. Yes, the stock since 2004 has done phenomenally well.

It’s gone from, you know, 50-60 dollars a share all the way over $500.00. So he’s riding a huge wave to the upside, but he’s also riding a very high beta stock. Now, if you don’t know what beta is, it’s essentially how much does the stock trade relative to the S&P 500?

If it has a beta of two, it means that it’s trading 2X of whatever the the S&P 500 does on a typical day. So beta of two. So if the market goes up 1% and then you got a stock with a beta of two, you’re going to assume on, on a typical day, it’s going up 2%.

If it has a beta of like -1 which you don’t really see a lot of those, it’s going to be going down 2%. It’ll have more of an inverse correlation to to the market as a whole. MSTR, MicroStrategy has a beta of over four.

That is an incredible, incredibly volatile stock. Incredibly. And yes, it’s a very popular stock right now. It’s right in the Bitcoin wave. A lot of people are trading into it, but it’s very emotional. Now. One of the things that I noticed that that George here is not doing is he’s not managing the profits here.

He hasn’t said nothing about the fact that I’m going to assume that he hasn’t He hasn’t done anything with the profits. So if you got a stock that’s going from 50 and it’s all the way up over 500, what like at what point are you looking to book profits? If you’re trying to say, well, I think you’d go higher than you’re looking to make a home run.

And I don’t believe in home runs. If the home run trade comes your way and you can and you can make a, a, a huge load off of it, great, that’s awesome. But our mindset when it comes to trading should not be, I got to knock this one out of the park. I got to get rich off of this one because trading is about the ultimate body of work.

It’s about what all you are able to do over a year period. That’s what defines your year over the lifetime of your trading. That’s going to be were you a successful trader when you’re trying to just knock it out of the park with one stock that that’s a losing strategy.

So if you’re not taking profits on a stock that’s gone from 50 to even just $60.00 a share, you should be taking some profits off the table. You should be trying to reduce your risk so that a stock that goes from 50 to 60, which is a 20% move significant.

I take profits much earlier than that. But if, if we’re just talking about from 50 to 60 and you haven’t taken profit yet, you know, you’re, you’re trading very undisciplined at that point. Now I can I can get if it’s a long term trade and you’re saying, look, this is a position that I’m looking to build up over time, That’s fine.

You take a stock like like Robin Hood that I have that I had a long term position and just you know that I started buying probably around like late to 2022, late 2023, it went up about 300%. I took something off the table there. But from a swing trading standpoint, you know, swing trading is much more short term.

So we’re looking at a short term move and, and the in the stock and you can go from 50 to $60.00. Yeah, I would be taking something off of the table right away. So we’re talking about a stock that when he was writing this e-mail to me, it was trading at over $500 a share.

And we have to be taking some profits off the table here. Now what? What when A1 trade defines a, a person’s trading career, it’s because it’s a losing trade. 1 trade can wipe you out. And so you have to go into every trade not only expecting it to lose, but also expecting that it could wipe me out if I don’t manage the risk appropriately because it can’t.

There’s too many trades. And he’s like, well, I trade Microsoft. OK, We’ll look at some of the stocks like over the years, like GE or or Sun Microsystems, you know, that doesn’t even trade anymore. It got bought out by somebody. But these are stocks that have taken like huge hits over the years. So you always have to manage the risk.

Look at IBM, that was like the Wall Street darling back in the 70s. Not anymore. Look at Intel. So you can’t assume that a stock can’t wipe you out because that’s usually the very moment where it, you know, you’re, you’re setting yourself up for your greatest risk.

So in this case with MSTR, it’s got a beta of four. It’s got a lot of volatility. That means if the stock market was to go down 2%, it’s probably going down over 8%. So it’s incredibly important that you keep the risk factor in mind.

The other thing is if if your emotions are getting to and if you can feel it, that is. And that’s exactly how he ends his e-mail to me. He says I can feel it, that I’m going to lose. If that’s where you’re at, then you’re very likely trading with way too big of a position size, way too big.

I mean, if you go into it where you’re putting 40 or 50% of your account on a single trade and you’re trading a stock that has a beta of four, the emotions are going to be high. I don’t care if it’s a $500 portfolio that you’re working with, what it represents to your overall account is going to create emotions.

So one of the things that I noticed in MSTR it it’s done really good over the course of 2024. I think it’s going to be one of these pop and drops. I think there’s going to be a lot of people, more people that lose money on MSTR in the long run. And from some of the things that I’ve read about it, where they’re just buying just gobs and gobs and gobs of Bitcoin, it has the potential to greatly backfire on them and as a result, backfire on their investors.

So I see a lot of people who trade terrible assets. He talks about this here. And his first sentence, he says, I have lost a lot of money trying to trade terrible assets. And when I think of terrible assets, there’s been so many of them going all the way back to 2020.

But before I get to those, make sure to not pass up on this good trading asset and that is swing trading. shareplanner.com that’ll take you to my SharePlanner website. It’s a really good opportunity to get all of my stock market research each and every day. That’s going to include my daily watch list, the stocks that I’m looking to trade each and every day.

I also send out a master bullish and bearish watch list at the beginning of each week. That’s where I curate all my trade setups from. Plus you’re going to get a watch list review at the end of each day where I’m going over how each stock in the watch list did, how they performed, how they didn’t do my take on them going forward.

Plus I also do mega cap updates on all the major stocks that that are moving the the market each and every day. Plus I do stock market updates throughout the week. The cool part is, is they’re done in video format. So you’re going to get a lot of good information from me each and every day.

So if you enjoy this podcast, you’ll love Swing Trading shareplanner.com as well. So check that out. And you’re also supporting this podcast and the process. So terrible assets going back to 2020. I think of the SPACs. Remember those things? Yeah, everybody was talking about, oh, this is a great SPAC. We got to get into this one.

I don’t know of too many SPACs that are still out there that people are actively trading. I mean, I know there’s some, but by and large, you don’t hear people on CNBC talking about SPACs and CNBC. They’re, they they’re a trend followers. They’re just going to go with whatever everybody else is talking about. What?

It’s what’s going to drive eyes to their TV. And at the time when SPACs were at their height of popularity, that’s what all they were talking about. SPAC, EVs, EV I know Tesla’s done pretty good over the past year, but let’s look at some of the other ones. Rivian it, it has had a a pretty tumultuous relationship with with it’s share price over the years.

It has just gone straight down, got a little bit of bounce lately, but overall, really a rough stock. Remember everybody was saying like, what was it? Nikola was going to go through the roof and and NKLA I think it was a stock symbol on that one. That one fell apart golly.

And it had all sorts of fraud too. Neo NIO, lots of people were buying into these EVs still buying into these EVs. I remember even before 2020 people were just like super hyped up on the solar trades, buying the ETF TAN all the time. NFTs, remember those guys? People were paying like millions of dollars for it. Like I still really don’t even know what NFT is at this point. It’s like a picture, an encrypted picture of some kind that you claim to own, but yet anybody can technically still like take a screenshot of that pictures.

I don’t ever know how NFTs could ever store their value, but people did. Maybe that’s just the old, old side of me starting to come out. Bitcoin over 100. Everybody was talking when it once it reached 100 that it was going to go to, you know, 200 or $250,000 and it still may get there.

I wouldn’t shock me if it did, but all of a sudden everybody’s starting to buy Bitcoin 100K. Reminds me when everybody was starting to buy it a couple years ago at, you know, 60K or before that when it had reached like 17 or 18. They’re always getting in at the tail end of huge runs and then they have to suffer through the massive pull back.

So you got NFTs, you got EVs, you got SPACs, you got Bitcoin. And, and, and not only that, Bitcoin, Bitcoin’s like really the, the least one to be upset about. You got all of the, the, the hot tool coins and the, and the fart coins and all these other ones that people have traded in.

And yeah, they’re, they’re losing their heads on those things. Maybe not fartcoin yet, but they will lose it on Fartcoin eventually. GameStop and AMC. And then when Roaring Kitty started putting his tweets out there again, everybody started buying into those only to get the rug pulled out from underneath them as well.

So that zero DTE, a lot of people trying to trade with with the Street on the 0DTE S got their heads handed to them trading stocks that were expiring the same day. So the purpose in me listing all of these things is that a lot of the people that are trading MSTR right now, not all of them, some of them have made some good money off of MSTR.

But what MSTR attracts, there are a lot of the same people that were attracted to the SPACs, to the to the the crappy EVs, to the NFTs, to Bitcoin at astronomical highs. And then still all the crappy coins they’re after, they’re always chasing the fad.

So when George is talking about the fact that he’s trading terrible assets, he probably should look really hard into why is he trading those? And often times it’s because he’s trying to hit home runs. When you’re trying to hit home runs, you’re going to be an emotional trader. You’re trying to be unrealistic.

You’re trying to project needs onto the market, variables onto the market that the market could care less about, but only care about what the market cares about. Don’t don’t try to project your your wants and your desires onto the market because the market doesn’t care about that. In fact, it’ll take advantage of those very things.

So don’t go into it with expectations. Don’t go into a what you need to get out of a stock. Go into it based off of what is the stock trying to tell me here? What am I able to do from a reward risk standpoint and and follow your trading plans. So all of this has in common is the need for fast money.

The stock market always feels like it’s a place for fast money, but anyone trading over any length of period of time will tell you that it’s slow and steady as she goes. That’s what ultimately wins. Boring trading wins over fast money. Fast money isn’t sustainable.

If you get fast money, you’re going to put it back right into the market and you’re going to lose it. So even the indices have have this tendency of late too. You look at the NASDAQ, it added SMCI, and then they had to take it right back out.

And then they added MSTR, which you know, that’s going to probably backfire. They’ve added PLTR which is not a bad company, but they’re adding it at a, at a quite a high valuation. I mean, I think they’re, they’re PE was something like, I want to say it was like 320 or something crazy like that.

I mean, way out there, they would have been much better off if they would have added PLTR before it made some of these, the, the crazy moves that it’s made over the last few months. Instead, they’re adding it at peak value. They’re probably never, never see that overvaluation ever again.

But All in all, whether it’s the individual trader or whether it’s the NASDAQ 100, there’s this desire for fast money. And there’s even a show on CNBC named Fast Money. But in the end, slow and steady as she goes, emotional trading is attached to the hip with fast money.

And when you start to trade emotionally, you’re going to destroy your capital. If you enjoyed this podcast episode, I would encourage you to leave me a five star review on whatever platform that you’re listening to me on it. They always that always goes a long ways. And if you’re listening to me on YouTube, watching me on YouTube, I guess I should say leave me a five star or not five star, but like and subscribe that.

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