Sunday 11 August 2013

Psychology of trading



GREED

In a winning scenario where the market is in your favor DO NOT let it fool you into thinking that your stock's potential hasn't hit its peak. Cover your "R" (the $$ amount you were willing to risk on the trade), cover your exits and ensure that your stop limits are in place for any reversals on the remaining position. In day trading let your remaining position ride until market close. 

For long term investments the same method can be used but continuous adjustment is needed as markets change over time.  

FEAR

Do not be afraid of losing on a trade. It's part of investing and you will learn from it. The worst is when you cannot accept your losses and suddenly your plan to exit the trade is delayed because of this. What usually ends up happening in this situation is an even bigger loss than what you originally had and this will certainly make you wish you had taken the first opportunity out. If you stick to your plan you will build consistency whether its a constant loss or gain you know that your committed and that's key when trading.  

HOPE

When you start to hear yourself hoping for a stock to be profitable or to turn around than at that point you know that your doing something wrong. Your showing the market a sign of weakness and your decisions are then solely based on emotions. "I hope this stock goes up in value and then maybe I will cover some of my gains. I hope this stock doesn't go down tomorrow or else I'm out of the money". Rather analyze what the market is doing and customize a plan so that you can eliminate the feeling of hope with the feeling of certainty knowing your loss and gain amounts accordingly.

REGRET

Missing out on a potential movement or feeling remorse on a decision you made that cost you money won't get you anywhere. You have to learn to move on and look for the next potential opportunity with a clear mind. If you missed a good investment opportunity don't be worried the market has plenty more for you in the future. On the other side, if a decision you made cost you money clear your mind as you will definitely need it in your next trade. If you continue to feel a sense of regret in either two of the situations your almost guaranteeing yourself being consumed by the market on your next trade. 

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