FOUR EMOTIONS can get in the way of good investing.
PRESENTS
FOUR EMOTIONS can get in the way of good investing.
PRIDE makes investors rationalize losses and prevents learning from mistakes.
HOPE makes investors hold on to stocks that should have been sold.
PRIDE makes investors rationalize losses and prevents learning from mistakes.
FEAR of missing out leads to buying the wrong stocks or getting shaken out of the right stocks.
GREED leads to hanging on too long when you should have taken profits.
The market is rational... but investors aren't always.
Whenever your own money is on the line, it's going to be emotional, and the stock market is no exception. But the market doesn't know who you are. And frankly, it doesn't care what you think or what you would like to see happen.
- William O'Neil
CHECK OUT THESE EXAMPLES
of how emotions cause some of the most common investing mistakes.
CASE STUDY:
After a stock breaks out and starts quickly gaining value, many of the best leading stocks have a tendency to pull back. Perfectly good stocks will often dip in value and retest buy points or 10-week moving average lines.
At this point, many investors will get impatient or scared that the breakout has failed, and they will sell prematurely--also known as a shakeout.
EMOTIONS:
HOW TO FIGHT IT
If you buy within 5% of a proper buy point and stick to smart trading rules, you can ignore the shakeout and wait for the stock to continue its breakout.
FEAR
CASE STUDY:
We all pick up bad habits in life, but in investing, it can be truly dangerous. A bad process can sometimes lead to good results; everyone can get lucky.
However, if you learn the wrong lessons from risky or foolish trades (that they pay off), or don't learn the right lessons, you can end up wrecking your portfolio. All it takes is one really bad trade to put a huge dent in everything you've worked for.
EMOTIONS:
HOW TO FIGHT IT
Follow your trading rules! Know your buy point and wait for it. Have your profit target and maximum loss point written down before you ever enter into a position.
PRIDE
Be fearful when others are greedy and greedy when
others are fearful.
- Warren Buffett
CASE STUDY:
You bought the perfect stock... or so you thought. The price stayed still when it was supposed to go up. Then it started falling. Then it fell some more. But you held on.
Sometimes investors are so stubbornly attached to a stock that they refuse to sell it. They are convinced that a downtrending stock's fundamentals are strong enough to power it back up, or that a magical turnaround is coming soon.
On the flip side, investors can become so enamored with one of their winning stocks that they hold it too long, thinking that the stock will keep going up and up. When the stock takes a breather or the market trends downward, that's how perfectly good profits get wiped out.
EMOTIONS:
HOW TO FIGHT IT
Admit to yourself that you can't "hope" a stock back up in value. Cut your losses on losing stocks (down 7-8% from your buy point). Know when to take profits on your winners (20-25% up from your buy point). Follow hard-and-fast rules about buy and sell points--especially when you're losing money.
PRIDE
HOPE
GREED
CASE STUDY:
Cheap stocks seem like a bargain: if you can buy that many more shares compared to an expensive stock, imagine how much more money you'll make when they double in value! Here's the problem: cheap stocks are cheap for a reason. Our research shows that the average price of a leading stock before its big price increase is $32. EMOTIONS:
HOW TO FIGHT IT
Maintain a price floor for stocks. Remember that you pay more for the best merchandise--it's an auction marketplace, and good stocks don't come cheap.
GREED FEAR
Don't buy a stock under $15 a share. The best companies that are the leaders in their fields simply do not come at $5 or $10 per share.
- William O'Neil
THE QUESTION IS: How can you prevent emotions from wrecking your profits?
1
KEEP FEAR, GREED, HOPE AND PRIDE IN CHECK
2
FOLLOW YOUR TRADING RULES EVERY TIME
3 DO A POST-ANALYSIS OF YOUR TRADES
4
THEN MAKE NEW TRADING RULES BASED ON YOUR POST-ANALYSIS
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