Posted by Martin Thomas on February 15, 2010 · Leave a Comment
Investing Money and the Common Emotions that Coincide
When investing money in the stock market you must learn to control your emotions. Your emotions play a major role in your ability to make money when trading stocks and the concepts associated with investment psychology can teach you this. In today’s article we focus on some emotions that emotional investors experience when investing money.
Fear and greed in the stock market are both common emotions felt by many investors. Some investors have trouble taking action when it is time to sell stock or other securities. They fear they will make a mistake so they either stay in a position too long, or they pull out of the position too quickly and ignore their exit strategies. This can also be an affect of greed. This emotion often is displayed by the investor who stays in a trade too long, waiting to see if they can perhaps make even more of a profit.
Often times, these emotional traders experience what is referred to as paralysis analysis. These traders get so caught up in trying to ensure that they make the correct decision, that they over analyze the trade, and they miss out on an opportunity by lack of action. Unfortunately day traders who are afraid, when investing money, try to avoid the emotional discomfort of regret, and end up doing just that.
There are other fears that lead to ineffective behaviors when stock trading online including denial and what is known as anchoring. Too often investors will deny that a problem exists to avoid having to take action. They may either become paralyzed and are unable to make a decision or they again, exit a trade too early or too late. These traders fail to let the trade play out and don’t know how to effectively cut losers and ride winners. During your trading education you should learn that anchoring is another strong behavior that results from the investor who lets their most recent experience determine their next move when investing money. These traders tend to ignore their trading rules and overall trading strategies and techniques because of a past recent negative experience.
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Posted by Martin Thomas on February 2, 2010 · Leave a Comment
Stock Trading Online – The Psychology of Trading
When stock trading online, it is important to understand that sometimes our biggest enemy is ourself. You may have all of the investment knowledge and stock market technical analysis training you may need, you may have practiced paper trading and have your trading plan down to a tee. While these are all great things and will help you on your way to successful trading, unless you have your emotions in check, you will still struggle to make a profit when trading stocks, commodities, or any other financial instrument of your choice.
In today’s article we explore some basic concepts involved with the psychology of trading and stock trading online. You will see how these concepts are important to your overall success when investing in the stock market.
- Patience – Patience is a virtue. You have heard this before and it absolutely applies to trading stock. You must wait for the right market conditions and not force a trade. Successful traders realize that there are times to merely observe from the sidelines and to avoid trading online in the market. Don’t let a fear of missing out on a trade take over your rational thought and careful planning.
- Fear and Greed – Fear and greed in the stock market are both extremely common trading emotions that can quickly derail your trading plan. when stock trading online. As stated above, many traders have a fear of missing out on an opportunity and may enter the market before it is wise to do so, while others may stay in a trade too long out of greed and the hope that they will achieve even greater profits.
- Expect the unexpected – When stock trading online, you have to mentally prepare yourself to expect the unexpected. Trades almost never play out the exact same way twice, and you must be prepared to lose from time to time. You may have done everything according to your trading rules and you still lose. It will happen, and you will not win every trade. When it comes to winning and losing out on trades, the most important thing is that you are winning overall, not every trade. Even the best traders will lose from time to time. In fact truly genius traders expect to lose from time to time and they don’t beat themselves up over it. They instead record what happened in their trading journal, and they take it in as an opportunity to learn something new.
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Posted by Martin Thomas on January 19, 2010 · Leave a Comment
Investing Advice for New Investors
There is a large and growing community of online investors as well as service providers and support groups to meet the needs of this growing community. Investing advice comes in many forms and is also abundant online. In today’s article we discuss investing advice for investors who may be new to investing and trading online, or for those investors just looking for a refresher.
Find your trading niche – this is great investing advice and it means that every investor must be sure they trade according to their investment personality. In order to determine this you must understand your risk tolerance. Are you a person who thrives on excitement and novelty, or do you need consistency and dependability? If you thrive on excitement, then perhaps you are better suited to be a day trader.
Research – you must do your homework before you begin investing in stocks and shares online, or before you begin investing in other markets. This requires that you not only determine your personality type in order to find your trading niche, but that you also research the methods in which you will trade, the stock trading techniques, the brokerage firm you choose, and much more. Perhaps you need a firm that offers charting or automated trading for online trading? The best investing advice is that you must take the time to determine your needs and then do the required research in order to meet those needs effectively.
Stick with your trading plan and trading niche – Once you have determined your trading niche, have done the required research, and are ready to begin stock trading online, you must stick with it! Adhere to your trading plan as well as the trading rules you have decided on and give them a chance to work. You may need to make small adjustments as you trade, but your overall trading plan should remain basically the same.
Control your emotions – One of the most important pieces of investing advice tells us that you must learn to master emotional trading. It can be said that your emotions affect your potential for trading success more than your trading methods and strategies. There are many trading strategies that work however if you do not have control over your emotions then they won’t get you very far. Trading anxiety and emotions such as fear, regret, denial, and overconfidence are common emotions that every investor feels at one time or another. The truly successful investor not only learns to recognize when he or she is feeling these emotions, but this investor has the tools required to deal with them in a way that brings them consistent trading success.
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Posted by Martin Thomas on January 5, 2010 · Leave a Comment
This is one of many technical indicators used when trading in the stock market using technical analysis. This technical indicator shows the average value of a security’s price over a set period of time and it is typically used to measure momentum and to define areas of possible support and resistance. In today’s article we will look at the different types of moving averages that investors will use.
Simple Moving Average (SMA) – this is calculated by adding the closing price of a stock or other security for a number of time periods, and then dividing it by the total number of time periods. Basically it shows the average stock price over a certain period of time and equal weight is given to each daily price. Stock trading basics tells us that in general long-term averages are slower to react, while short-term averages are quicker to react to changes in the price of the security.
Weighted Moving Average (WMA) – this is calculated by taking each of the closing prices over a specific period of time and then multiplying them by its certain positions in the data series. As you learn how to trade stocks, you learn that this indicator assigns a higher weight to recent price data than it assigns to the SMA. Once the positions of the time periods are accounted for, they are then summed together and then divided by the sum of the number of time periods. The WMA is not as popular as the EMA, described below.
Exponential Moving Average (EMA) – this indicator is similar to the SMA, except that more weight is given to the latest data. The EMA actually reacts faster to recent price changes than the SMA as well. The EMA is also used to create indicators like the MACD explained below.
Moving Average Convergence Divergence (MACD) – this indicator shows the relationship between two averages of prices. There are also three common methods that are used to interpret the MACD and these are explained below.
- Crossovers – when the MACD falls below the signal line, it is a bearish signal and this indicates that it might be time to sell. On the other hand, when the MACD rises above the signal line, there is a bullish signal that suggests that the price of the asset is most likely to experience upward momentum. Most day traders and other types of traders wait until the crossover is confirmed before they will enter into a position as part of their trading rules.
- Divergence – this occurs when the security price diverges from the MACD and it signals the end of the current trend.
- Dramatic rise – this occurs when the shorter average pulls away from the longer-term average. It signals that the security is overbought and it will soon return to normal levels.
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Posted by Martin Thomas on December 10, 2009 · Leave a Comment
As a mentor I find it interesting to observe human behavior when it comes to basic stock trading 101. Let’s take Tim, for example, before he began working with a mentor his emotions were in charge of his financial future.
We started our relationship by having Tim keep a detailed trading journal and emphasized noting his emotions at various stages of his trading. Later, Tim reviewed his trading journal and discovered an interesting pattern of emotional trading. I’ll try to illustrate his roller-coaster of emotions as he watched his stock prices rise and fall.
Observe his excitement as prices increase and watch his depression as prices decrease. Does anyone, other than me, find it interesting that he was ‘happy’ and ‘sad’ at roughly the same stock price? The same for ‘hopeless’ and ‘hopeful’ at just about the same price? While the prices were roughly the same, his mind had conflicting emotions. (natural behavior in an unnatural environment) In the illustration above, Tim closed his trade very close to the same price as his entry.
As Tim worked with his stock market mentor he learned to give new interpretation to his emotions. Trading the same pattern but with newly associated emotions. Through working with his stock market mentor – Tim confidently entered and monitored his trade. He was able to identify his trading emotions, yet he remained relaxed as he observed the price peak. This time, he calmly observed the pullback and took the opportunity to take his profits.
It is foolish to think anyone can trade without emotion, but you can learn to master emotional trading. Work with your emotions and identify your ‘trading type’.
In a perfect world investing would be a planned mechanical process, with set procedures in place for entering and exiting a trade. In the real world investing creates the ‘fight or flight’ response and sends our brains into overtime. Fear can be your friend, alerting you to possible dangers. But if you become fearful on a regular basis, how do you know when to act on this emotion? Conflicting, isn’t it?
Tim perceived danger in his earlier trading plan, but was unable to properly interpret his emotions. Ultimately, he became incapable of making a decision and sat helpless in a pool of emotions. Tim’s stock market mentor helped him to understand how to work with his emotions and gauge when they were weakening his judgment.
While many authorities repeat the same old adages; ‘control your fear’ or ‘don’t give into stock market fear and greed’ The Genius Trader provides specific tools and exercises to handle emotional trading. Our free podcasts are designed to teach individual investors to trade in a calm state. Through proven techniques you will learn to control negative self-talk; break through limited beliefs; reduce stress; and trade in a peak state.
Below Martin shares with you entry parameters he used for initiating new short positions in EURUSD and EURCAD Forex crosses and how these parameters can be used to short USDCAD while minimising risk.
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Posted by Martin Thomas on November 24, 2009 · Leave a Comment
Trading anxiety affects every stock market trader at some time or another. More often than not, this trading anxiety can have devastating consequences on your trading decisions. Anxiety is the mind’s response to real or perceived threat. Its purpose is to send an important mental (and sometimes a very real physical) alert signal. Unfortunately, when we are under stress our decision-making processes are not at their best.
Research suggests individuals become risk-adverse when nervous. Trading stocks by its very nature is risky and requires mastering of trading anxiety.
Do you have a plan to handle your trading anxiety? Trading anxiety is inevitable and no-one is exempt. The successful investor meets emotional challenges head-on.
Ever wonder why two people can make the same exact trade, at the same time, and yet one makes a profit while the other loses miserably? The winner is a successful investor because they have incorporated techniques to combat their emotions. It isn’t enough to study fundamentals and stock market technical analysis if you can’t pull the trigger.
Develop your game plan to overcome your emotions and the fear of failure. You can spend countless hours and hundreds of dollars looking for that perfect trading technique and trading strategies. But, if you can’t handle your emotions while executing your trades, your time and money spent is worthless.
The Power of Visualization
From the NLP perspective, visualization intentionally directs the mind to use memories, fantasies and a combination of both for better performance. NLP is a popular tool among athletes. Whether using “Visualization”; “Swish Pattern”; “Anchors” or “Modeling” the outcome is increased success.
Take one simple exercise and prove to yourself there is power in learning how to control your emotions. Recall a time when you performed the perfect trade (fantasizing about the perfect trade is also acceptable if you cannot recall one). During this recall intensify the feelings by making this image brighter. Remember the calm state in which you executed your trading decision. Include the certainty with which you placed this trade while pushing the “buy” and “sell” button on your trading platform.
The whole point of visualization is to create the entire circumstances which allowed you to perform with complete self-assurance. Replaying this scenario in your mind, over and over as an exercise, gives your brain the ability to call upon the same successful circumstances for the next trade. For fun, try a few other techniques to strengthen your picture. Try tilting the mental picture back and forth; make the picture larger and smaller; add depth to make it two dimensional. The more vivid you make your visualization the stronger it becomes. Much like an athlete you are preparing your mind and body to duplicate winning results. Numerous studies have shown the difference between winning a gold medal and being an also-ran in athletics is as little as 1%. We believe trading in the stock market is similar.
Take control of your trading success and take advantage of our free podcasts to get on your way to mastering your emotions which will ultimately improve your trading skills.
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Day Traders
Posted by Martin Thomas on December 23, 2009 · Leave a Comment
Day Traders and Trader Psychology
Professional day traders know about trader psychology and how it affects their day-to-day trading. Trading anxiety and other trading emotions can greatly impact every trader’s ability to succeed when investing in stocks. It is for this reason that it is very important for traders to understand some of the concepts associated with investment psychology.
Genius Traders understand that they must learn to accept and recognize their emotions. Too often you hear investors say that they need to rid themselves of emotions when learning how to trade stocks. Not only is this impossible to do, but you wouldn’t want to completely rid yourself of emotions while trading. All traders must learn to recognize their emotions and then they must come up with a plan to address these emotions in a way that positively affects their trading. Also, it is important to understand that our emotions can act as triggers, just as technical indicators act as triggers, to tell us that action is needed. While we don’t want to base our actions on our emotions, emotions can help us to determine when action is needed.
We quickly learn in stock trading 101 some emotional investors tend to make up trades if their profit / loss is negative and they are waiting for their next trade to come along. These traders display emotions of anxiety and impatience. As a result they may jump into a trade that goes against their trading system. These traders continue to increase their losses as they tend to force trades rather than wait for trading opportunities.
There are numerous other emotions that emotional day traders can suffer from including the inability to accept a loss, confirmation bias, and many others. These emotional trading concepts as well as many others are addressed in the study of the psychology of investing and addressed in my Free Stock Market Podcasts.
MARKET COMMENTS BY MARTIN
In the video below I discuss a contrarian position we initiated long stock market long US Dollar, I’ll explain why we took this trade and how we will manage it.
Filed under Insight Newsletter · Tagged with Market commentary, Stock market newsletter, trader psychology