How Your Mindset, Ego, and Emotions Affect Your Trading

Hopes Anda Dreams Don't Make You Money

There is a world of difference between making money and being right. More often than not, the pride and ego of a trader will lead him/her away from profitability. Have you, or do you know someone, who believed wholeheartedly in a particular stock and wouldn't sell it even though they were losing a lot on the trade?
Relying on hopes and dreams does not make you money in the stock market. Also, keep in mind that there is an opportunity cost for not cutting your losses short. Holding losing trades for a long time takes away from the possible profits you could be making on a winning one.

When placing a trade, Some people think about how much they can make, while others think about how much they are willing to lose. If you talk to a professional trader who shows consistent results, you will discover that they usually think about the latter. That means that, before a professional trader places their order to buy, they have already predetermined where they would sell if things go wrong and how much they will lose. As a rule of thumb, there is a general principle to not lose more than 10% on your buy point on a particular trade. The general rule is there because things can go wrong very fast due to the way percentages work.

man in white and black checked dress shirt holding white printer paper

It's Not Luck If You're Calculated

Let's say you invest $100 and lost 50% of it to the markets. That means you now have a working capital of $50. How much profit do you think you will need to break even?
The correct answer is 100%, or double your money (double of 50%). The more you lose, the harder it is to make it back. As for losing 10%, on the other hand, it will only take you an 11% gain to make it back, which is very doable since most stocks will practically move up 10% in most bull trends. The rule of the game then becomes, lose small until you make it big. When you make it big, you will generally gain everything you lost, plus some.

Always remember to put your ego aside and do your job as a trader. A trader needs a clear and analytical mind, not an emotional one, so always keep this in mind: Just because you lost money doesn't make you stupid, and just because you gained doesn't make you intelligent. You just lost or made money.

Don't miss these stories: