Psychology of Trading - How Not to Goof a Good Trade

Don't you feel like kicking yourself when everything went according to plan but you decided to interfere with a trade? What would have turned out into a tidy profit was aborted as a loss!

How can you trade without letting your emotions getting in the way? Novice traders can execute trades without batting an eyelid. It's when you've been around the traps that fear or trepidation can rear its ugly head. External factors can also jeopardise your trading ability. Going through separation or divorce is not the time to trade no matter how much you need the extra income. Embarking on a career as a day trader when you are unemployed is not advisable either. You will put undue pressure on yourself.

It is best to be detached to your trading activity otherwise you may inadvertently cross over the line and it will become sheer gambling. A good approach is to start with a handful of stocks (meaning no more than five!) and do some old fashioned research on the fundamentals of the company. Can you corroborate from other sources what your broker is saying about each of those stocks? Looking back at 12 months price charts what were the events which caused each stock to rise or fall abruptly? Were there any trading halts, share splits, dividends withheld, etc...

In the first six months do not spend more than 4 hours a week on your share trading activity. A lot of people study their portfolio on the weekend and place orders on Monday morning. If you have a contrarian spirit, do your research on Wednesday night and place your trades on Thursday morning. Placing trades on Friday just before the close of the exchange is not very safe. A lot of unforseen events can happen over the weekend.

When you place a trade you should enter the market only if the stock moves in the direction you expect. Say equity XYZ closed at $50 and you think there is some good upside potential, then only buy if it reaches $51 - a 2% move. Bail out if it goes down to $46 - a 10% move against you. Set yourself a reasonable target - say sell two thirds of your position if it reaches $56.

Use a trading log (spreadsheet) and count how many losses in a row you have suffered so far. Tally your average gain and your average loss. Each time you take a trade and you stick to your rules you should expect to be within your track record. If things stray way out - your system is broken and you need to reconsider what you are doing. Maybe you need to trade other instruments more profitable.

After you have been trading the same 5 stocks for a year and are well versed on these equities you may leverage that knowledge to other markets - forex, commodities, indices.