The US Stock Market has skyrocketed in value over the last 2-years. As of early last year, it surpassed the historical valuation mark of being worth 30-trillion dollars.
That massive sum and the amount of wealth that it’s generating for investors has enticed people to stop sheltering their money in high-interest savings accounts and instead, start pouring cash into the stock market.
If you’re new to investing and have decided to foray into trading as a serious venture, you’re in for a wild ride. Today’s markets are every bit as opportunity-filled as they’re filled with horrifying pitfalls. As an investor, it’ll be your job to side-step the bad stuff and cash in on the good.
A big part of being able to do that is mastering your trading psychology so you can avoid what’s called “emotional investing”. In this article, we share tips on how to do that.
1. Define Your Why
As with all ventures in life, knowing why you’re undertaking a challenge is helpful to keeping you on the right path. So, before you put a single dollar into the stock market, ask yourself, why are you trading?
Are you trying to make enough money to match the salary that you were making at your boring office job? Are you just trying to generate enough income to hit your retirement goals on time?
Whatever your reasons are, keep them at the forefront of your trading psychology. Never make a decision that isn’t intended to produce a safe step in the direction of what you ultimately want.
2. Diversify Your Investments
Every trader has a professional background. Some come from the entertainment industry, others got their starts in hospitality.
Many of these traders only dabble in stocks that live within the industry niche that they’re familiar with. Those traders are letting their emotional attachment to a particular sect of the market jeopardize their portfolios.
As a trader, you have to be willing to learn about different industries because you need to be able to confidently invest money in contrasting places. The more diversity that you have in your portfolio, the less pain that you’re going to feel when markets fluctuate.
3. Don’t Invest to Not Lose Money
Have you ever been to a casino and were so obsessed with not losing money that you hardly played? People that do that typically walk away with a meager return on their investment as a best-case scenario.
As an investor, you can’t put money into the market with the goal of not losing. You need to invest to win.
Part of being a winning investor is making big moves that will occasionally fail. Understand that’s part of the game and don’t let fear of taking a hit every now and again deter you from generating enough momentum to hit your goals.
4. Learn How to Parse News
Nothing effects trading psychology quite like the news.
You read a report in the Wall Street Journal that Airbnb had a good year so you run to the computer and sell your Hilton stock. You hear on the radio that a plane crashed in Thailand and you sell your Delta shares.
Making hasty moves like that is a horrendous way to live your life as a trader. Instead, learn which news stories warrant sells and if so, how much?
Should you clean out your portfolio? Should you just be hedging your holdings?
Always have a game plan in place when it comes to news so you don’t let the news cycle dictate your strategy.
5. Never Chase the Masses
Don’t invest in something because everybody else is doing it. That kind of trading justification is one that has zero basis in understanding what it is that you’re investing in.
Your trades should always be grounded in your understanding of a company and a non-biased analysis of how you project a stock is going to move over a period of time. Throwing that research to the wind to chase down a popular holding is a recipe for long-term loses.
6. Don’t Develop Attachments to Holdings
If you were playing a game of chess, you wouldn’t not sacrifice a pawn if doing so was a great move just because you really liked that pawn. The same holds true for investing.
If a company that you like is reading like it needs to be sold, don’t hesitate to sell.
7. Anomalies Shouldn’t Affect Your Investment Strategy
No matter how much you study the stock market, a sound trade will occasionally produce a bad result. When this happens, you should never let it put you off of your strategy so long as your strategy is sound.
Trading successfully is all about winning more than you lose. People have gotten rich off of being right just 51% of the time so don’t get emotional when a good short positions play, pump and dump or another trading go-to loses.
8. Win the Year Day by Day, Not in a Day
Your goal as an investor coming into a day of trading shouldn’t be to hit grand slams. People that do that spend their lives in states of feast or famine and develop serious lifestyle issues.
Your goal should be to string together enough small victories to equal something great at the end of the year. If you do that, you’ll pave the way for long-term and consistent success in the market.
Our Final Thoughts on Trading Psychology and Emotional Investing
Trading psychology is something that you hone over time that allows you to take your feelings out of the money that you invest. By exercising our tips above, we have no doubt that you’ll be able to master your psychology as a trader and build an excellent career for yourself in the stock market in no time.
For additional tips that inspire young titans of finance and business, check out more of the content on our blog.