Trading Tip: Don’t trade on emotion!
As always these tips are merely suggestions, and are offered for informational purposes only. Trade smart, and always do your research.
(NEW YORK)–One of the biggest mistake new traders make is trading off emotion, and not having set discipline on when to buy, and when to sell. This is something even the most experienced traders out there will tell you they fight with all the time when trading small cap stocks.
Learning not to trade on emotion is a very valuable skill.
Example: You may see a hot stock being discussed on some social forums and your brain tells you get in before it’s too late. You find the excitement so much you jump in, and then find the next day the stock has dropped 30% or more and you feel just awful.
Well after you composed yourself the next morning you tend to make the second biggest mistake in trading and start to panic. You see your losses build and you sell into that fear, and then wonder why did i do that? Am I doing this right? Then you just want to give up.
First off, don’t worry. You’re not a loser. We have ALL made that mistake before, lol. You are not alone, trust me!
Why Does This Happens
The dopamine levels in our brain, which gives us feelings of joy and euphoria, shoot off when your stock is going up, and we tend to want to chase that high.
When a stock goes down we feel it even worse as our fight or flight instincts kick in, and that’s when we make really bad trading decisions.
So What Should I Do?
Discipline: Teaching yourself a good set of principles and discipline is first good key to become more effective trader. It’s easier said then done, but that’s why it’s called discipline.
Buy Example: You buy a stock and tell self when this rises 20% or 40% I’m selling, no matter what.
This can be done by setting a sell limit order at higher price
Set a sell limit order good to cancel, and leave it. If it hits and you miss out on a 50% or 70% return so what! You still made a good trade and return, and that’s all that matters.
Sell Example: You bought a stock and it isn’t doing what you hoped, and you feel this isn’t a trade I want to be in. Set a floor saying if this stock drops more then 20% or 25% from where I bought it I’m out.
This could be done by setting what is called a “stop loss” order
By setting this in place it’d like insurance so if you must go out and about or errands you will always know if something bad should happen you have protection in place to limit your losses.
Note: There is difference in stop loss, and stop limit, which we’ll cover in future articles
Be a Contrarian
You really want the secret to investing success? Be a contrarian!
This means you BUY when everyone else wants out, and you SELL when everyone is talking about something going to the moon forever.
This is the golden secret to making money long-term.
If i had told you to buy housing stocks in 2009 in the middle of the housing collapse you would have said I’m crazy, and hit me on the head with a shoe, but that was the exact time to buy.
If I told you to buy Bitcoin in late 2018 below $4000 when everyone was convinced it was going to $0, that was your signal.
There is an old saying on Wall Street, “buy when there is blood on the street”. This actually meant buy when you see like riots, or some other horrible events unfolding on the news. But it also means when some sector looks so bad that no one wants to touch it, then that could be the signal it’s time to start nibbling in at those levels.
In short even the most experience trader will tell you they battle making decisions based on emotion all the time, and no one is perfect 100% of the time. So you are NOT alone!
As a new trader you will make mistakes, and you will have your losses, but hopefully some of the tips we provide you here at Trader Madness can help you start off with little more knowledge, and clearer view of how this all works.
We will be covering many other subjects like how to read charts, setting stop loss and stop limit orders, how to watch for toxic notes and reverse splits, and many other things new traders need to learn.
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Trader Madness is an online community of active traders and investors. One of our goals is to help educate people new to trading by sharing some basic tips, and past experiences to help them learn the basic about trading small cap stocks.