Think back to the last time you got emotional about something you were purchasing. What was it about this product that got you so fired up? Was it something that was going to improve your health? A shake weight?
Was it a new car? A gift for a loved one? Do you feel like the dollar tag might have had an influence on why the purchase was so emotional to you?
Usually whenever things start getting higher and higher in price we get more emotional about them. There is an adrenaline rush when we purchase these items because we are using hard earned money we have saved up. It’s a big decision! Unfortunately, emotion can spell disaster in your trading. Emotions cause us to make irrational decisions and they can often cost us lots of money. In this article, I’m going to be discussing the importance of leaving emotion out and give you some tips on the best ways to do that.
I am Mr. Roboto
When you are trading, you want to try and be as robotic as possible. This can often be very difficult when you are trading with hundreds or thousands of dollars. This is money that you have worked your ass off to get! You are emotionally tied to it because of all the hours and hard work you put in to get it. The value your account will fluctuate over time and you need to get comfortable with that. Imagine someone coming into your home and stealing $2,000 dollars from you. This is what it feels like when the value of your investments starts to fall. You haven’t lost that money yet but it feels like you have and you start to panic.
In my time as a broker, I talked with so many clients who had lost millions of dollars in the stock market crash of 2008. They all panicked when prices were their absolute low and sold out. Then they were too afraid to get back in the market and missed out on all the recovery that occurred the following years. In most cases, they have been sitting in cash since and it was sad to see.
The shorter duration of your trading, the more emotional you will become. Think about it. If I am trying to day trade a stock (buy and sell within the same day) I am going to be 100x more emotional than an investment that I plan to have over a year. I have a limited time to see that investment make money and want to capitalize on it. When a stock starts to head in a negative direction, in our mind, we will say, “It can’t go much lower I will hold on till it rebounds.” This kind of thinking is what leads to big losses in your account.
So how do we avoid falling into this trap? Everyone’s personality and risk tolerance are going to be different so what I recommend is coming up with your own set of rules that you stick to. These rules will be something you develop over time when you begin to trade and learn what works best for you. I’ll share mine so you get a better idea.
- Stick with your exit strategy
Remember in the article, “The Holy Grail of Trading”, where we talk about having an exit strategy? Whenever you go into a trade you always need to know when you are getting out of it. You set your stop loss (price you what to sell if things don’t go your way) and you stick with it. This way you are taking emotion out if the stock starts heading in a negative direction. You can be carefree and don’t have to be stressed about what the stock is doing all day. The goal of trading is to make money while you sleep! But we also don’t want to lose sleep over our investments. If you know when you are going to exit, you do not take on big losses and avoid catastrophic events like the 2008 crash.
- Rely on Technicals
I rely on technical charts to get me in and out of trades. Think about when we discussed trendlines, support/resistance, and stock channels. If I see a stock break through a resistance point on a chart, then that would signal a buying opportunity for me. On the other end, if it breaks a support level then that is the time I might want to exit the trade to avoid further losses. Even if I love what a company does and have a high outlook of it for the future, I will still not invest unless it looks good to me on a technical chart.
In my time trading, I have realized that quality is better than quantity. I lost over 2k in my account before I ever made a dime because I was not patient and was chasing money. I was day trading so much that I would get into trades that weren’t ideal. This all caused me to be more emotional. I found that by being patient and waiting for trades that were ideal, I started to have much more success and I was way less stressed out!
- Don’t Let Losses Consume You
Trading can quickly become gambling if you let it. You WILL have losses, as I mentioned before in another article, no matter how experienced of a trader you are. Sometimes you will lose money on a trade and you immediately think to yourself, “I need to make that money back.” This kind of thinking will lead you to making riskier and riskier decisions. You will find that your losses start to compound. When you have a loss, it is best to walk away from your computer and gather yourself before you make any other decisions. I personally think it’s best to take a whole day to get your head back to thinking clearly.
As I said before, you will develop your own rules as you begin to trade more. I made so many mistakes starting out as a trader and those mistakes cost me a great deal of money. Although being unemotional isn’t something that you would normally think of when it comes to trading, it is something that can ultimately make the difference between being successful or not.
Homework: Take the risk tolerance quiz from the link below and begin to start thinking out some of the rules you could set for yourself to be more discipline. The quiz will get you thinking about how comfortable you are with taking losses.