The Stock Market Investor's Worst Enemy
Every stock market investor faces one primal enemy. An enemy so perverse, it will drive thousands of investors from the stock market through its ability to defeat even the most practiced investment strategy. Who is this enemy you ask? Your arch nemesis, in this case, goes by the name E. Motions?don't ask me what the "E" stands for.
Emotions are the driving force behind every stock market cycle. Quite simply, if they weren't present in the stock market, investors could be reaping rewards based solely on the expanding or receding economy, and professional traders wouldn't have any juicy profits from those emotional mistakes to grab.
Here is an example scenario:
Let's say that you've done your homework, read the books, traded on paper, and now you're making your fondest dream come true by investing in the market and making money!
You maturely approach losses as part of the learning curve. You've experienced your share of them but your wins are still in the lead, thanks to the commitment you made of not deviating from your chosen strategy. Euphoria sits on your shoulder.
One day, after 3 frustrating hours in traffic, you get home to find changes. You know that you should follow your strategy, but Stress and Greed are in charge. You're buying and selling outside your strategy, but are confident that it will be ok - just this once.
Now prices are dropping and Fear enters the room.
Fear attacks every investor's self-confidence with a voracious need for control. You spend sleepless nights listening to his mantra - you don't know what you're doing.
Fear and Greed are now dictating the strategy. Self-confidence is on the critical list. Reason and Caution are under attack and are losing.
You ignore the primary investment rule of buying low, selling high because you've lost too much and have to recoup. You close your eyes and dive in to recover your losses. "It will work," says Greed on your right. "It has to work!" responds Fear on your left.
Your partner has now entered the fray and is hounding you about the lost money. Your capital is almost gone. You erred grievously and invested money that you need now. Margin calls are being made. You're out of control.
While the components of the above scenario will change, the catalyst of this nightmare remains the same - emotions. You'll survive the nightmare, but the experience will forever change you. Fear will shade every future stock market decision and severely limit your ability to objectively evaluate any investment opportunity out of fear that you'll lose again. But, it doesn't have to be that way.
Developing a strategy to deal with emotions can give you a winning edge.
Here's how:
- Don't go into the stock market to feel good about yourself.
- Always look outside of the stock market for self-gratification and affirmation.
- Make a commitment to stick to your chosen action plan or strategy. Don't deviate.
- When a loss occurs, examine it and learn from it. Don't try to get even.
- Think before you leap into anything
- If you are stressed out, vulnerable, or overly emotional (high or low), do not trade. It's not worth the financial risk.
Remember, the key isn't denying or curbing your emotions, but instead understanding how they impact your investment decisions and developing a strategy to work with them.
About The Author
Jeff Fairchild is the publisher of http://www.best-stock-trading-systems.com The site includes tips, techniques, strategies, and systems designed around improving your stock trading profits. Investors and traders! Are you overwhelmed by all of the online stock information on the net? One of these pages may be of help:
http://www.best-stock-trading-systems.com/internet_stock_investing.html
http://www.best-stock-trading-systems.com/trading_stocks_online.html
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Acapulco - The Stock Market Dives
There is a famous cliff on the ocean in Acapulco where experienced divers jump into the sea. It is very dangerous because the water at the base of the cliff surges from a depth of 2 feet to 12 feet.
Stock Market Investments
If there is one term over-used when talking about making investments in the stock market I would think that term would be: buy low, sell high.Buy low? Sell high? How low is low and how high is high? I like the term buy low, sell dear, much better! But better still are the terms buy and hold, and dollar-cost-averaging (buying the same stock at different prices through the years).
Performance Funds
Mutual funds are doing more and more to discourage investors from leaving them and taking their money to a better performing fund. What does better performing mean? It has nothing to do with who the manager is, what the expense ratio is or how well they performed over the past 5 or 10 years.
Price Targets
Every day in any financial publication you will find the Wall Street mavens giving their predictions on many stocks. It was issued here and should go there.
Race Horses and Mutual Funds
For years investors have been taught to look into the composition of a mutual funds. In other words the "experts" want you to take the time to analyze the stocks within the mutual fund portfolio, categorize them by industry group and try to understand the objective of the fund manager.
Cash
How many people went to a cash position this week? There is no question that this market has scared the bajebers out of many investors, me included. Fortunately, I started going to cash some time ago, but I did give back a substantial amount of my profit.
Forecasting the Stock Market
Every day I see in the financial section of newspapers how to forecast what the market will do in 6 months, 12 months, several years. "Ten stocks that will double in the next 6 months.
Protect Your 401K
Checked your 401K lately? Going back to about a year ago many of these retirement accounts have shrunk by 30%, some even more. What Happened?You have been putting money in for years and your employer may have been contributing to your plan also.
Dividend Reinvestment Plans: Investing on Automatic Pilot
If you're like many investors who squander those small dividend checks from your stock portfolio, a Dividend Reinvestment Plan (DRP) might be just what you need. Just as its name implies, a Dividend Reinvestment Plan allows you to reinvest some or all of those dividends into more stock of the issuing company.
Defining a Long-Term Investment in the Stock Market
For some "long term" would mean holding a stock position over the weekend. For others, it may mean holding a security for at least 1 year for the purpose of declaring a long-term capital gain, thus saving on taxes.
The Great Stock Market Secret
When the stock market is going up and all your stocks and mutual funds are making money you feel like a genius. It is too bad that some folks don't remember what happened in 2000.
The Information Age
It is wonderful to be alive in the information age. We know in a matter of seconds the change in the value of gold in Switzerland, the death of a world leader or the birth of a peasant in Israel.
The Stock Trading Plan - Why You Must Have One To Trade Successfully
This is the continuing story of our two imaginary traders, Peter and Paul.Peter is a professional trader, Paul is not.
How To Buy And Hold
One of the most believed bits of conventional wisdom from Wall Street is to Buy and Hold. Any stock or mutual fund should be put away for eternity and never sold.
So, What is This Stock Market Thing Anyway?
We've all heard of the stock market and probably have a general idea of what it is and how it works either from high school economics classes, television financial reports, and the countless film depictions of what happens on the floor of the New York Stock Exchange. But how does it really work and what is meant by "playing the stock market?"The Stock Market in a NutshellCompanies sell shares of stock as a means of raising capital.
Enron Cure
Let's hope you did not have any of the Enron stock. Maybe you know someone who did and lost everything, but you certainly might know several people who owned stock that lost almost everything.
The Skinny on Mutual Fund Investing
Mutual fund investing is a lot like Thai cooking. Everyone has heard of it, most know a little something about it, but very few actually know how to do it and do it well.
What Does it Take to be a Stock Trader?
It takes a total mental commitment to the task. It becomes a complete way of life.
Long Term Investing
In his wonderful book, 'Multiple Streams of Income', best selling author Robert Allen advises Investors to divide their Stock Market investment and trading capital into three portions -50% invested long term (forever) in an Index Fund, 30% invested in Accelerated Stock strategies and 20% in options or high risk investment strategies.This article will discuss long term investing and how technical analysis can alert us to points in time when it is prudent to take profits and exit the Stock market.
Nest Eggs and Omelets
Do you have a nest egg? You know, a place you are stashing away money for the future - retirement, down payment on a house, the kids education. That kind of thing.