Trading Stocks Trilogy-1: The Psychology

If your mind is not in the right place with trading, it could lead to you blowing your account in no time at all. Shocked that something so touchy-feely could ruin your trading? It has been reported widely that the statistics show that 90% of traders fail. Naturally you only hear of the few traders that make it, and not the silent multitudes of failures, the goal is to become part of that top 10%.

The trading terminal is definitely not the place for you to sort out your personal problems, or even emotions. There are too a lot of distractions which trick your brain into doing things you ought to not be doing. Much like Odysseus in Greek mythology who had his sailors fill their ears with beeswax, and ordered himself to be tied to the mast, so that he would not fall prey to the  enticing of songs of the Sirens, driving those who hear their voices to madness and destruction. When you trade, it is easy to fall into the same trap, listening to the seemingly good advice of others filled with “sure thing” trading tips. You must tie yourself to the mast of your own trading strategies and steer clear of all distractions.

Here are some “masts” to help you stay sane while trading:

Mast 1: If you are in a bad mood, or even if you’re just upset about something personal, don’t trade

Mast 2: Don’t think that good news mean a stock will rocket up, or that bad news will make the price fall

Mast 3: Do not pay attention to the experts. There are usually none in the capital markets. Stock movements are probabilities, with no one can predict with certainty. Most professional market managers actually perform very poorly.

Mast 4: Do your own own analysis, then make your own call on whether to trade or not.

Mast 5: Once you have decided to trade, just do it, don’t let fear hold you back.

Mast 6: Do not allow greed to let you lose a trade, never let a winning trade exit with a loss.

Mast 7: Use leverage very carefully, it magnifies both your wins and your losses.

Mast 8: You alone are responsible for your trading results. Rather take a small loss early than wiping your account out later.

Mast 9: Never let your risk on a trade exceed 5% of your trading account. This means you should always have a stop loss, and the size of the stop loss should not put more than 5% of your account at risk, regardless of the size of your position.

Mast 10: If you are doing day trading, never take your eye off your charts while you have an open position, the market can change in the blink of an eye.

Mast 11: Put your strategy in writing. It is easy to forget your trading strategy while you are trading and have lots of other things to think about.

Mast 12: After you close a trade, take a moment to clear your mind. Take every trade with a fresh mind.

Mast 13: Accept that you will not be right every time, if you’re no longer certain about what’s happening on a chart, exit your trade immediately.

Of course you could add another dozen rules of your own, but these are enough to alert you to at least some of the more important points to look out for when day trading. Research has shown that we can only keep track of about 7 things at a time, attempt to handle more than that at the same time, and you start dropping things.

Make sure that you understand why you are in a trade, if you’re trading on hunches, guesses and wishes, you will not be successful. Stay safe trading!