Find the Sale
Find the Sale
I was recently on a flight and was speaking to the gentleman seated next to me. He asked me about what I do for a living and of course my opinion of the markets. But the next question caught me off-guard and really made me think. He asked, "Can you sum up what you do in one sentence that a lay person could understand?"
After some thought, my reply was, "I teach people to buy stocks on sale and sell them when they are expensive." That is the most basic summary of what we are supposed to be doing when we are trading and is something we can all relate to in our everyday lives. When you buy a car or shop in the grocery store, if you are like most people, you will look for discounts. When things are cheap, we tend to buy more of them. When they are expensive, we buy only what we need or find a substitute.
If we can do that with our normal shopping in our lives, why is it so difficult to keep that habit when we are trading? Instead, the emotions of fear and greed step in and we chase stocks that are already going up for fear of missing an opportunity. Instead, why not buy the stock that has been put on sale from massive selling pressure? How about when we hold onto a stock that has been going up for so long because our greed tells us it should keep making us money? We need to be realistic and identify when the stock is overbought and likely to correct or reverse and lock in our profits.
Trading is simple. It is definitely not easy though. We must apply the same basic principles we use in our everyday lives to our trading and investing. The simple part of trading is to create rules to follow that give us identifiable, high probability, low risk opportunities in the market. The difficult part is adhering to those rules and maintaining good discipline in your trading.
We often underestimate the importance of psychology when it comes to trading. The hard part is not finding opportunities in the markets; they are abundant. The hardest part of trading is overcoming what is going on in your head as you trade. There are several mental trader traps that you need to identify and conquer in order to be successful in any market.
Have you ever attended a charity event where there was a silent auction? This is where you bid on an item by placing your bid on a piece of paper into a box. You do not know what anyone else is bidding so in order to get the item, you may place a higher price than you would have normally done. That is why those auctions are held in that manner; to get more money in donations. In the markets, many people chase price since they do not know where the price may go and want to participate in the movement, (i.e., get the item).
Most of the time these traders catch their stock just before it turns on them and the losses start to pile up. We can easily avoid this by planning every trade before we take them. By identifying your entry, exit, and stop before you are involved in the position, you are more likely to enter at a rational point and not one that is fueled by emotion.
No one likes to be wrong. When we enter into a trade, we want it to make us a profit. So often, traders will rationalize or even ignore data that tells us we are not in a good position, or that we are about to see a loss because we do not want to admit we were wrong. One of my fellow traders and instructors, Paul Orme, said it well, "The sooner you can shake hands with the fact you are going to be wrong from time to time, the better you will be as a trader."
As traders, we will not be right all of the time. Eliminating large losses from our portfolio will increase our chances for success. After all, it is much easier to overcome a small loss than it is to overcome a large one. We need to remain objective in the markets. We do this with proper planning before an entry and remaining disciplined in our adherence to our trading rules and plan.
There are many more psychological pitfalls that you need to be aware of to increase your chances of succeeding in trading. Online Trading Academy's courses offer solutions to many of these common ailments of traders. Come see what we have to offer and how you can fix your trader's mind as well as your trading account.
- Brandon Wendell
- Brandon Wendell
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