Sunday, November 16, 2008

Being positive and denial when trading

Being positive is always a good thing in any aspect of life. In the trading world it is almost impossible to make money without having positive thinking.

Without a positive attitude it becomes harder to pull the trigger. You are unable to place the trade because you are unsure if it is going to work out or not.

Having confidence means you have done your homework, found the perfect set up in the perfect market environment and are ready to pull the trigger. You are also willing to let the trade ride until your rules give you a sell signal. You are willing to do this because you are confident in your rules and trading strategy. That is being confident in your trading.

Having just plan denial is different. Denial occurs when the stock falls past your stops and continues to fall. In this case you ignore your rules and do not exit because you believe your stock is still a good investment. You hopelessly hold onto the stock with the idea that it might come back someday,

Denial often leads to hope, it can make you start hoping your stock will get back to where it originally was eventually. Hopefully you will break even or make a profit.

Denial and hope can be dangerous in two ways. You can hold onto the stock and eventually make a profit after many years. This may seem like a good idea at first glance, but holding onto a stock throughout the down times and riding it back up can often times produce very small returns in the stock market. In such a case your capitol would have been better off following your rules.

It could also lead to a point where the security never comes back and you are forced to just accept the loss. Most people do not see this as an option in the stock market but it does occur.

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