March 23, 2006 at 8:08 am | | Comments 6

The Flip Side

You’ve probably heard the phrase, “you’re not trading the stock, you’re trading the people on the other side of the stock.” It’s a valid point that I can agree with to an extent.

As much as you might follow a trading strategy, there will likely be emotions to battle while you’re in the middle of a trade. Almost every trade will have some fear and greed associated with it, but the memorable trades are really packed with emotion on both sides. Keeping close tabs on your emotions while maintaining some awareness of what your competition is facing can greatly help you improve your exit timing as well as your P&L.

Meet paranoid trader Rich Quick

Meet paranoid trader Rich Quick

As traders, it’s certainly important to understand which emotions are impacting those on the other sides of our trades. For example, If I’m long XYZ stock and I’m losing money, the trader who’s short XYZ may well be getting greedy. As a result, he’s probably in no hurry to buy back the stock (which would help to support price and help out my trade). Knowing this and staying aware of it during the trade would remind me that I am probably better off taking the small loss and moving on to the next trade rather than making matters worse. I can always wait for a better spot and re-enter if I still like the trade.

In another example, say I buy ABC stock on a reversal play off of support. The trader who sold it to me is likely short the stock, and once ABC catches a bid, I know he’s in trouble. As momentum picks up steam, I might offer some out into the strength, but I’ll be looking to ride that stock further just knowing the emotions and disbelief that those on the other side of my trade are dealing with. Ultimately, they’ll capitulate and drive my trade higher, allowing me to capture greater gains.

Consider your own emotions during a trade, but also the emotions of those on the other side of the trade. Even a quick rundown of what the guy on the other side of your trade must be feeling could prevent further losses or help you maximize an already successful trade.

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Jeff White
The Stock Bandit, Inc.

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