In the book "Reminiscences of a Stock Operator," Edwin Lefevre writes:

"The speculator's deadly enemies are: Ignorance, Greed, Fear and Hope."

In today's commentary we will take a look at "Hope" and see why it is one of the four deadly enemies of successful market timing.

Each of us has a desire for success. That is why we use market timing in our investing. Not only to increase our gains in both bull and bear markets, but importantly to protect our capital against loss.

But that same desire for success can stand in the way of our ability to recognize reality, even if it is right before our eyes. All of us have a survival instinct that typically causes us to focus on good news. Bad news is avoided, or at least put on the back burner.

When we take a position in the market, whether bullish or bearish, we hope it will be successful. Hope can be such a powerful emotion, that when the same trading plan that told us to enter a position originally, reverses and tells us to exit immediately, our emotions may very well focus on the possibility that if we just hold on a bit longer, any loss may be erased.

Just give it another day. Just wait till it is back to break even.

The only way to avoid this is to recognize that hope can destroy our ability to effectively market time the markets.

Hope vs. A Plan

We all know that no person (trader, market timer) will be right all the time. Knowing this, we must accept that we will have losses.

Trading cannot be successful without a plan. Trading by emotions, by news events, or out of fear, is not very different than gambling. Successful market timers win because they follow a plan. Unemotional and with clear buy and sell signals.

"...market timing is not gambling. When you trade with a "plan" you have an edge that you know will win over time, as long as you use discipline and follow it."

What separates the winning traders, from the losing traders is their ability to recognize that when a trade turns bad, there is no emotion that can fix it. The only correct decision, is not really a decision at all. Just follow the "plan." If the plan says reverse, then follow it. If the plan says to go to cash, then go to cash.

Simple? Nope, not if you cannot accept a loss. Then hope springs eternal (excuse the pun). Winning traders have their share of losses. But they keep the amount of those losses small. They follow their plan and "never" hold onto a position "hoping" it will turn into a winner.

Hope vs. Gambling

When we go to Las Vegas, we know that the odds are stacked in favor of the house. But we gamble anyway in "hopes" that we will leave a winner.

But market timing is not gambling. When you trade with a plan you have an edge that you know will win over time, as long as you use discipline and follow it. Just as the house knows it will win over time in Las Vegas, the trading plan provides the edge that makes us winners. It separates us from the urges that turn winning trades into losing ones.

But once we start hoping, we lose that edge. We become just like the gamblers in Vegas.

And in Vegas, the house always wins.

Hope vs. Ego

Hope is also closely tied to ego. We do not want to admit that we have made a mistake. Our ego wants success, and wants it immediately.

Losses do not feel very successful. Our ego can cost us a great deal of money.

In order to make money, we need to keep losses small, while letting our winning positions run. Neither hope nor ego has any place in market timing. Neither hope nor ego has any place in making trading decisions.

Conclusion

When you trade with a plan, it is in black and white. It has no emotions attached to it and thus the signals are not swayed by emotions. A plan does not rely on hope. A plan has no ego. A plan gives us, as market timers, an edge over the market.

Each day we should examine ourselves. If we feel that hope is part of our trading plan, remember that hope is almost a guarantee of losses.

The only way we keep our "edge" over the stock market, is when we follow the plan.