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.
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Jeff Fairchild is the publisher of
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