There are many characteristics and skills required by traders in order for them to be successful in trading stocks. The most important thing of all is your state of mind, learning to not be influenced by fear and greed.
The Psychology of Trading
The psychological aspect of trading is the most important determination if you will be successful or not. The reason for that is fairly simple: A trader is often entering and exiting stocks on short notice and a times a quick decision is needed.
To accomplish this, you need to be in the right frame of mind. You need to be disciplined so that you stick with your trading plan and know when to take a profit or loss. Emotions will be your downfall, you need to be objective and not let the occasional loss get to you.
One of the most important things you must learn is to take small losses. Losses are a part of trading, keeping them small and manageable is your key to becoming a successful trader.
Understanding your Fears
When a trader’s screen is flashing red and bad news is released about a stock you own or the markets in general are headed down, it’s not uncommon for the trader to get scared. When this happens you may overreact and feel compelled to sell everything and go to cash. If you do that to avoid certain losses that is fine but if its just out of fear then you will have trouble re-entering a trade when all your indicators are saying buy.
Traders need to understand what fear is. Its simply a natural reaction to what you perceive as a threat. People fearing a loss will be unable to act in a objective manner. This is why it is so important you have a price point ahead of time that you will get out and accept that you were wrong. If you can do this, you are well on your way to becoming a successful trader.
Your Worst Enemy is Greed
There’s an old saying on Wall Street that Bulls make money, Bears make money BUT “pigs get slaughtered.” This greed in traders causes them to hang on to a winning position too long, trying to get every last dollar. This trait can be devastating to a trader as he will not exit a trade when it is becoming obvious that it is time to exit the trade and take profits.
Greed is difficult to overcome because within many of us there seems to be an instinct to always try to do a little better. A trader should recognize this instinct if it is present, and develop a trade plan and be disciplined.
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– Robert Walsh