It’s important to learn to overcome your emotions so that you can buy stocks that are starting to go up and sell stocks when they start to go down. You have to know the difference between a strong stock that is going higher and one that is near its top. Stocks that are falling can be sold before they fall further, but at a certain point, they get so low that they are worth considering.
Here are 10 things you can do to overcome your emotions and become a better investor:
1. Use Strategies that Work
Your approach to the market won’t have a hope if your analysis methods are not effective. There are many ways to analyze stocks. Take one that you like and test it until you have confidence that it works.
2. Write a Trading Plan
Success has a better chance of happening when you write down a plan to get there. Have your plan include your rules for entry and exit, risk tolerances and a process for review. Adapt your plan over time as you continue to find better ways to achieve success.
3. Manage Risk
Understand the risk in every trade you make, and don’t take risks that you cannot tolerate. If your exposure to loss is more than you are comfortable with, you will inevitably break your discipline.
4. Limit Losses
You should always know where the exit door is in case something goes wrong. When you buy a stock, decide the point where the market will have proven your decision to enter wrong. If the stock falls to that price, get out! Don’t let small losses grow into big losses.
5. Blame Yourself
There may be a good argument for why a loss you have suffered is someone else’s fault: The newsletter writer could have been wrong, the media could have been wrong, the government could have gone back on a promise, the company could be corrupt, etc. Blaming others will never get your money back. You will not change the actions of others, you can only change your own. Therefore, blame yourself for everything that happens with your money and take steps to make it better.
6. Stop Falling in Love
The more you know about a company, the more likely you are to ignore the market’s message. Companies want you to own their stock. The more investors that they get to own their stock, the higher the price goes. As a result, there is a bias to the information that you are exposed to. If you listen too much you may miss activity in the market that is telling you that something is wrong.
7. Practice Patience
Up trends start slowly so you have to be patient when stocks are trying to start a long-term trend. The profit is in the patience. Hold onto strong stocks as long as they are showing strength. When looking at a company, avoid a short-term outlook that can mislead you about the long-term trend.
8. See the Other Side of the Story
Everything you know about a stock may tell you to buy it and you may do so with complete commitment. However, always ask yourself, “Why is someone willing to sell to me at this price?” If you understand their motivations for selling versus your motivations for buying, you can better determine who is right. Without an understanding of the other side of the trade, you cannot determine whether the other side is wrong.
9. Avoid the Herd
The crowd usually loses. When buying, look around at your fellow buyers. Are they well informed, smart investors or are they generally uninformed people watching 60 Minutes? Always try to be one step ahead of the herd.
10. Analyze Your Results
The market is always evolving. Making constant evolution in your approach to the market is important. On a regular basis be sure to analyze your trades and look for patterns of self destruction. Make changes when necessary.
Check out more blog posts here:
- How to be a Part-Time Trader with a Full-Time Job
- How to Buy Weakness in an Uptrend
- Top 10 Ways to Think Differently About the Stock Market
