Objective Vs. Subjective Stock Trading: Pros and Cons

Updated on October 24, 2017
Glenn Stok profile image

With 40 years experience trading stocks, options and futures, Glenn Stok writes about strategies and controlling risk that he has perfected.

The topic of subjective and objective trading is usually related to technical analysis. However, this article is different. I’ll be discussing the true nature of a trader’s opinion that affects decisions to buy or sell.

When one is subject to market moves, they become biased. This subjective viewpoint can negatively affect decision-making because it’s based on feelings and opinions rather than preplanned strategies.

As long as one can remain objective, they can relate better to what needs to be done with their portfolio. They will find it easier to stick to buy and sell decisions that were planned ahead of time.

I find it’s always best to plan your strategy and stick to your plan. That’s staying objective.

I’ll admit that this fails at times too, but it is a more mechanical method of trading. It eliminates the emotional feelings of fear and greed that is inherent with subjective involvement when the market makes unexpected moves.

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You’ll have a better understanding of where you stand with your trading decisions when you view your trades objectively. Once you understand this, you’ll know how to avoid being a victim of subjective thinking.

For clarity, here is a list of synonyms for objective and subjective:

Objective
Subjective
Impartial
Particular
Neutral
One-sided
Unbiased
Biased
Unprejudiced
Prejudiced
Independent
Skewed

What Are the Pros and Cons?

Objective vs. Subjective Trading

One can only view the market objectively when not involved in a trade. This is when we have a clearer vantage point to understand what’s happening that affects the market in general, or a particular stock we might be interested in trading.

Once we are invested in a trade it’s difficult to remain objective, especially without a plan for an exit strategy. We are subject to the whims of the market and therefore we will tend to let emotions get in the way. That’s because we are too deeply involved with the trade.

It’s very difficult to continue to have a clear head and make objective decisions when we are already invested in the outcome. A clear and detached objective view is replaced with subjective emotions related to the investment.

While a trader is invested in the market, or a particular stock, and watching the fluctuations of his or her account, subjective rationalization interferes with good judgment. We try to rationalize the decision for our next move without realizing that fear and greed are guiding us.

Con: Subject to Fear

A conscious analysis of the market is better performed without being invested in the outcome. As long as there is no fear of losing, one can clearly analyze the data and determine what they expect the market to do.

This means that one can clearly consider what may happen based on current market conditions. If, however, one is already involved in a trade, then he or she is doomed to be subjective, hoping for the market to do what he or she wants it to do, rather than what is expected based on analysis and due diligence.

Con: Subject to Greed

This is a terrible position to be in because this is where failure to be objective can get in the way of success.

How often have you had a trade go against you and you think to yourself that it will turn around, so you wait? That’s not being objective at all. You’re letting your emotions control the situation. You’re decision to do anything is subject to your greedy emotions. You can’t admit that you may have been wrong and you let a losing trade get even worse.

Another thing subject to greed is when you have a nice profit and you don’t take it. You leave the trade hoping for more. You think to yourself that if it’s doing so well, it will continue. That’s greed.

Stocks always have only a 50% chance of going higher. That never changes. Just like when you flip a coin, it has a 50/50 chance of being heads or tails. If the coin comes up heads five times in a row, it’s still only a 50% chance that it will come up either heads or tails the next time.

It’s the same with any investment. If a stock continues to climb, it still only has a 50% chance to move another tick higher. Your greed kept you from selling and taking a nice profit, and you end up giving some of it back.

We need to have some way to remain objective at all times, especially when involved in a trade.

Pro: Remain Objective by Trading Mechanically

Trading mechanically helps avoid being subject to emotions. It helps being consistent with successful trades and not becoming subject to changing market conditions. It means to have a strict method to follow no matter what happens.

If we have a strict plan of action, and follow that plan without letting our emotion, greed or fear, change our plan, then we can remain objective and we don't let the market effect how we handle our trades.

The method, being mechanical, is to follow a procedure for execution of managing an active trade to completion, either with a gain or a loss.

This is the only way to avoid fear and greed. It took me many years to learn this. It took me even longer to learn to be strict about it. I eventually discovered several rules that I abide by. These rules actually help maintain an objective view of my investments.

Rules for Trading Success

Trades not taken are important to trading success. If a trade doesn’t look good, don’t do it just because you hope it will work. Here are several rules to keep in mind:

  1. Patience: Be patient and wait for an obviously successful trade to be available. Trade selectively.
  2. Avoid Hopes and Wishes: Don’t enter or stay in a trade just because you hope it will work out. Do your homework; analyze the company and trade based on performance.
  3. Loyalty: Don't be loyal to a position. When you think you’re wrong, close a position. Get out! Don’t let a bad position het worse. It may turn around and come back to you, but that’s just wishing and hoping.
  4. Size: Don't increase position size just because you’re making money. Keep trading the same amount. If you keep increasing the size, that eventual time when you lose will end up being on a bigger trade. That’s not what you want.
  5. Frequency: Don't trade just to trade or just to get another small gain. Remember the rule about patience.

What have you learned?

We can easily become subject to assumptions and unrealistic expectations when we are in an active trade.

The only way to have a clear objective strategy is to plan the trade ahead of time and stay mechanical while managing the trade.

The results will have a better chance of being positive.

© 2017 Glenn Stok

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