Saturday, March 22, 2008

Keep your emotions in check.

Fear and greed can lead a trader to lose all of their money. It is a common mistake that many amateur and even a few professional traders will make. How many of you have bought a stock at $90 watched it go down to $87 got scared so you sold it only to watched skyrocket to $130.

When you did this you were encompassing fear into your trading system. You saw that you were starting to lose money in the trade got scared and sold it. Despite the fact that it only dropped a little bit and gave you no sell signal. I know it may be hard to stay in a trade after your stock has dropped a little however you must stay in it until your rules tell you to get out.

If you know that you will get out if you lose even a penny, don’t get in. If you are trading and your stock has came down to just above your stop you must stay in it. If you have a hard time with that, get away from the computer. Do something else and forget about it. A very successful trader once told me that every time they trade they pretend they are trading someone else’s account. That way if they lose money it doesn’t feel like they lost their money.

So you’ve got the fear down, what about the greed? Here is a different scenario. How many times have you got into stock that went from $60 to $90 real fast? You were jumping for joy, dancing around having a good time. You passed your target of $80. But you feel it can go higher. You just want to squeeze 10 more points out of this stock. It’s already up so much, 10 points is nothing, right? So you hold onto it. Then your stock goes down to $50. Owe, now you have a loss, should have got out when you were ahead.

So, how do you combat greed and fear? The best thing you can do is to have a well tested trading system and have faith in it. The more confidence you have in your trading system the more likely you will just follow it. Be a robot for a few minutes while you make trading decisions. Only do what your system tells you, no more, no, less.

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