Sunday, February 7, 2010

Reduce the effects of emotion and negative psychology

So how can you reduce the effects of emotion and negative psychology?


Many investors will spend more time researching and analysing alternatives before spending $100 on an item of clothing than they do entering a trade which might cost them $1000. Be sure, that before you make a trade you are aware of all the parameters which could potentially cause you to suffer emotional pain. A sample checklist may comprise of:

Understand your maximum loss
- know what the maximum amount of money you want to put at risk on the trade. If need be, set a stop loss. Knowing the amount of maximum risk will remove any second thoughts you might have at the last minute. We have all heard the "should I sell, yes....... no .......yes" scenario. Don't let this be you.

Understand it's OK to take a loss - no investor will make correct decisions every single time. You need to understand that it's perfectly acceptable to take a loss on a trade. The crucial aspect is managing the loss. Remember the old saying we introduced earlier, "Cut your losses and let your profits run". This is true and you should make a solid effort to adhere to it.

Don't become emotionally attached to your trades - there is no point falling in love with your trades. The market does not love you, so you should not return the favour. When you become emotionally attached, you will start to make decisions with your emotions rather than with your head. Emotion in trading is dangerous. Don't become emotionally attached.

Take adequate position sizes - don't take large positions if you can't live with them. A large position size is great when it goes up, but you should never forget the opposite effect when position goes down. You should always take position sizes which enable you to get a good night's sleep. As the saying goes "Don't bet the farm."

Be in total control - there is no point contemplating serious trading/investing if you are not in total control. You are in control when you have total visibility of your performance, both current and historical. Having information readily available will sharpen you and enable you to make decisions a lot clearer.

The items listed above will enable you to trade/invest in a more secure way, void of emotion and highly effective.

Remember that your psychological mindset is one of the most important ingredients to your success in the market. Be disciplined and you will put yourself ahead of the majority of other traders/investors.

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