Everyone wants to make money when trading the stock market. However, if making money is your only motivator, be careful. I have found that trading to make money is dangerous because of the emotional attachment we have to our cash.
When we focus on money and are motivated by greed, we tend to ignore the obvious. If you are trading to make money then a number of psychological problems enter the trading decision. Consider something as simple as crossing the road. What do you think about when crossing a busy street? Are you solely motivated to achieve the obvious goal of getting to the other side? Not likely. You are probably thinking a lot about getting to the other side without getting run over.
Here are 4 things to be wary of if money is your top motivator when trading:
1) Don’t settle for “pretty good”
Traders worry about missing out on an opportunity. We may look at a trade and think that it is not ideal but still “pretty good”. You may remember the last “pretty good” trade set up that came along and how it did really well. Then you remember the pain associated with missing out on that pretty good trade set up that you ignored. That motivates us to take this trade, even though it is less than ideal.
Would you cross a busy road if you had a “pretty good” chance of making it without being hit? Would you jump out of an airplane if there was a “pretty good chance” that your parachute would open?
2) Don’t work too hard to find something to trade
When our trading decisions are motivated solely by money, we tend to work very hard to find something to trade. While a good work ethic is important to be successful in life, working hard to identify opportunities in the stock market is not always good. Doing so means we work hard to find things that are not obvious. Therefore, it may not be even worth trading. I find that my very best trades are the ones that I don’t have to think twice about. They are the ones that jump off my trading screen when the stock is in front of me. I don’t work hard to find them, they find me.
3) Tend to sell winners too soon
When we trade just to make money we tend to sell our winners too soon. We want to lock in that good feeling of making a profit and don’t want to ever feel the frustration of having a winner turn into a loser. So we exit the stock when it feels good or we exit at the first sign that the trade might make us feel bad. This causes us to not ride out the inevitable pull backs along a longer term trend.
4) Don’t manage risk effectively
Finally, focusing on the money causes us to not manage risk effectively. When we think about how much we “could” make if the stock goes up then we might buy a position larger than we are willing to lose. By taking too much risk, we are more likely to not sell our losers when they reach a sell signal or exit our winners too soon because of the fear that the winner will turn into a loser.
So what should our top motivators be?
Rather than focus on money when you trade, I want you to focus on being right. Do your analysis on a stock and then ask the following questions: “Am I right to buy this stock?” “Am I right to short sell this stock?”
Make your trading an intellectual exercise, a challenge to your brain to be right more than you are wrong. Take your focus off of the green and on to the black and white. The easiest way to do this is to focus on the charts and not focus on your account’s profit and loss indicator. I strongly believe that if you focus on making the right decision instead of focusing on making money, you will end up making more money anyway.