Adopting the Right Mindset for Trading
The most successful traders are master’s of their emotions and have a strong mental constitution.
This is because trading is largely mental; being confident making decisions based on your analysis, sticking to your plan, and not letting your emotions get the best of you.
You must be willing to fail and persevere. There will be times of great joy, but you will also have to weather some storms.
It’s tempting to pour everything in to generate big gains when the market is hot, but you must keep in mind there will be times of big variation, changing market environments and other unforeseen circumstances.
These events may be stressful, but with the proper mindset and plan you are prepared.
Setup Your Goals
Setting goals allows you to focus on the bigger picture – you create your own goals and strategy in order to know when you want to buy & sell.
Every trade you enter has a specific plan for entry and exit. It will go your way or it won’t, you have a plan & timeframe for both scenarios. This helps to control your expectations, allows you to
Cut losses quickly, but have a plan in place to take profits, here are two examples.
- Your stock gains, but you haven’t reached your target. You want to ensure you are profitable. Add a stop loss below the current price where you’d be willing to take profits. (safe is around 10%, aggressive is around 20%). This is less applicable to penny stocks as there are large daily variations, you may want to use strategy #2 below.
- Your stock gains, but it’s a bull market. Add a sell limit to secure your initial investment (50%, 100%, it depends from what you want)
Have Spare Cash
“Buy when everyone else is selling”
At the end of a bear cycle, there will be plenty of bargains available.
Take advantage of the sell-offs by having spare cash. Red days are a great time to buy shares of a company you’ve always wanted.
The markets & indexes are optimistic and moving in an up-trend.
Losses will be recovered quickly, and investments will generally appreciate in value.
Bull markets are a consequence of positive economic or political news, the right market environment and great new innovations…
The markets and indexes are pessimistic and in a down trend.
Investing during a down-trend might make you take a loss before seeing a turnaround. (There may be a continuous drop.) But there is a big opportunity at the bottom.
This is a consequence of negative economic or political news, fears, poor market conditions and unsteadiness around the world…
Smart investors make the most gains by acting wisely during transitions in and out of these two market environments.
Correction / Sell-Off:
Occurs when a company gained value too fast. A sell-off will be created as investors want to secure gains and the stock price will go back to the fair value.
FOMO (Fear of Missing Out):
Happens when a share price gains value quickly. Investors fear they will miss the opportunity and will buy at a premium.
By chasing gains like this, investors risk buying at the highest price.
Once the gains from FOMO are over, investors will quickly sell-off the overpriced stock. The share price goes back to normal and those who sought gains & didn’t sell will become “Bag holders” because of the premium paid.