The Toughest Part of Any Trade
The toughest part of any trade isn’t knowing when to buy a stock.
It’s actually knowing when to sell, especially when you become emotionally attached. Sounds ridiculous, doesn’t it? Then again, so is trading on emotion.
To illustrate, think about the last trade you got upset about. Think back on why it made you upset. Then think about what you did and how you traded when you got upset.
Did you panic and sell? Or did you act rationally?
Imagine you took a position in ABC ahead of earnings with the expectation that this time things would work out well.
Then it happens. ABC beats. Yet the stock sells off.
Wait a minute… It should be going up. What happened? Oh jeez, what happened? I’m panicking. Do I sell? Do I buy more? What’s happening? Oh jeez, I’m down $5,000 in two hours. Do I buy more? Do I sell?
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And there you are panicking because of an initial reaction in the stock.
My advice – knock it off. This isn’t a marriage. If you’ve lost money, suck it up, sell and move on. The market wasn’t designed for emotion. Losses will happen. The more you accept that fact, the better you are for it.
In short, think rationally. Look into what happened. It may be a temporary pullback.
To battle the emotion of trading is simple.
- First, breathe. Relax. Calm down. And realize losses happen.
- Second, separate yourself from the trade. Stop creating attachments to stocks.
- Third, have stop losses in place. If your favorite stock goes against you, your broker has an order to get you out of the trade and save your money.
- Fourth, look at the cold hard facts. What’s happening fundamentally and technically with the trade?
- Fifth, realize that just because you had to sell your stock now, you can always buy it back in the future when fundamentals and technical analyses improve.
- Sixth, find the next hot stock to love and move on.
- Seventh, don’t allow yourself to get caught up in herd mentality. All of a sudden, every one is selling on what appears to be bad news. Yet, the only thing taking it down may have been a short-lived reaction to a headline.
Bottom line – there isn’t an exact science to trading a stock. But once you begin to trade strictly on emotion, you actually make your situation worse. Remember to keep a clear head when buying or selling any stock. Dig into the fundamentals and the technical patterns. Don’t get upset if your stock falls 10 cents or if an analyst downgrades it. Stay focused and aware of what’s happening.
Look at NVIDIA for example. After skyrocketing to become the greatest runner of 2016, the stock was downgraded in early 2017. The stock fell from a high of $120.55 to less than $100 a share in days, as traders overreacted, thinking the run was over.
Yet, they overreacted. Fundamentals were still intact. Growth was as strong as ever. It’s why the stock rebounded back to $110 in the weeks that followed. Emotion forced traders out of a great stock for no real reason.
At the same time, though, emotional trading is great for contrarians. The more severe the overreaction on emotion, the better the opportunity once the selling is exhausted. In fact, take a look at what happened to NVDA in April 2017 at double bottom support once RSI, MACD and Money Flow became oversold on emotion. It bounced back.
Be rational. Leave the emotion at home.