How to Control Your Emotions When Trading Stocks or Options // Investing tips, Stock trading strategies 101 welcome to looking at the markets with David Moadel
today we're going to talk about is super important topic
it's how to control your emotions when trading stocks are options emotional
trading can blow up your account so you must get your emotions under control
this is necessary if your emotions are controlling your trading you're going to
end up
it's hard enough to win this game of trading already and if you're going to
use emotions rather than data or information to guide your trading then
you're going to end up with a lot of emotional distress and your bank account
will suffer as well so what are the two emotions that control both the markets
and individual traders
well if you look at this cartoon you can see there they are
fear and greed those are the two primary emotions driving not only market
directions but also probably your individual decisions and mine too
you know we're all human here we're emotional creatures as well as rational
so it's mainly fear and greed whatever it is that you're feeling whatever
you're feeling as a trader or investor it's probably related to one or both of
those emotions fear and or greed
so i'll give you some examples here if you're feeling an excessive desire to
protect your capital that's really a form of fear
now you should have some desire had to protect your capital
of course and that's why we hedge whenever we trade or invest or at least
we should but when it becomes excessive that's really fear if you are feeling a
concern about leaving money on the table
that's really a form of greed and much i'm not trying to insult you by calling
you greedy
ok or fearful for that matter it's just a feeling that you're having and it's
normal and natural because again we're all human here if you're feeling
hesitation to get into a trade
even though you know the trade is a good one
the data or the information is telling you to get into this trade but you
hesitate that's a type of fear and if you're not taking profits
maybe you bought something and you made a really good profit and you said you
would sell
you said you would exit at this price level and yet you don't do it
that's great not taking profits when you said you would
that's a form of greed and you need to combat this cycle of investor emotions
and it really does look like a roller coaster and if you take a look at this
it's a it's a great chart because it shows that euphoria is the point of
maximum financial risk and it's so funny when you're feeling euphoric when you're
feeling super greedy
that's when you're least aware of your financial risk and when you're feeling
fearful super fearful or when the market or when everybody else seems like
they're feeling super fearful for you
that should be viewed as a point of maximum financial opportunity
now I'm not saying I'm not telling you to to catch a falling knife as they say
you know if a company or a sector or the market is really in trouble
I'm not telling you to buy when things are falling superfast necessarily
ok you might have a stock that it really is in jeopardy of going out of business
or whatever
I'm not telling you always to buy at that point don't get the wrong message
from this
ok I'm just saying that this cycle of investor emotions is not going to serve
you well as a trader and here's a simplified form of it
this cycle cause you the emotional cycle
- it will cause you to buy the top and then sell at the bottom you know if you
buy when everybody's feeling greedy and you sell when everybody is is fearful
you're going to buy at the top and sell at the bottom and you'll repeat that
cycle until you blow up your account until you lose all your money in your
account and that is not not a good policy
so how do you combat this emotional trading you do it by first of all
becoming a contrarian
and again I don't mean catch a falling knife or anything like that
I mean think for yourself if you want a definition we can give you one
it is a contrarian is a person who opposes or rejects popular opinion
especially in stock exchange dealing
ok opposing or rejecting popular opinion
going against current practice and that doesn't always mean doing the exact
opposite of everybody else it could just mean rejecting popular opinion
ok you can listen to what everybody else has to say but you have to think for
yourself and use use data as your basis use the information
so in other words if everyone zigs use egg or at least you
you don't have to again do the opposite of everybody else all the time you just
ignore popular opinion and think for yourself
that's the idea and it takes practice to become a contrary and if you're not
already in natural contrarian
so for inspiration you can study the words and philosophies of people like
Warren Buffett Ben Graham Paul Tudor Jones jim rogers and as you can see
contrarian timing can really pay off
here's a chart showing that over time
contrarian timing can that not in every instance but over time it can beat a
simple buy-and-hold strategy
now if you're prone to emotional trading here's there are some tips for you
you can use your online brokers platform to automate your by points your profit
taking points and your stop loss order resist the temptation to just wing it or
play it by ear or to use mental stop losses
I'm not saying no one should use mental stop losses but again this is if you're
prone to emotional trading you might want to forgo the mental stop losses
choose your entry and exit prices before you make the trade and let technology
take care of the rest
and that again instead of using mental stop losses you can set it with your
broker ahead of time walking away from the computer for a while or the phone or
however you trade
is oftentimes the best way to stop your emotional trading
now I'm not saying if you're a day trader that you should walk away for a
long period of time that could be disastrous
ok if your day trader you probably have to watch the monitor you have to monitor
the markets pretty constantly but as a swing trader
I feel comfortable walking away from the markets for short periods of time
I don't mind that because again i want to avoid being too emotionally invested
in it
combat emotional trading by choosing your entry and exit points before hand
and stick to them
combine this policy with a think for yourself
contrarian policy and you'll be a step closer to trading with data rather than
emotions
if you'd like more help with this or with any aspect of trading stocks
options or financial advice or ideas support in general you can contact me at
David Modell @ gmail.com
I'll be glad to help you thanks a lot and hope to hear from you sometime soon