Patience is key IMO. It really doesn’t matter what you buy but when you buy it and also when you sell it, so I have a shortlist and simply buy on technicals/intuition. The worst thing to do is to buy or sell under pressure, best to be patient and wait for good opportunities to come along. They do eventually…
Practice patience (don’t target to make so much per week but try to take advantage of each opportunity as it presents itself). This will help you reduce the risk of overtrading. A rising share price is exciting but it doesn’t make the money. It is closing the trade that makes us poorer or wealthier. Trading without stress is the key; whaterver your target you would do well to halve it.
Making your psychology work for you in the long run, by Michael Hewson, Market Analyst, CMC Markets
The most important concepts when it comes to trading any type of market are mindset and discipline.
Anyone who has been trading for any length of time will tell you that trading can be a taxing emotional experience, as a trader will go through a wide range of emotions over the course of a single day.
I remember when I was a junior trader all those years ago, experiencing the elation of a day when pretty much everything I did went according to plan. At the same time I remember that knot in the pit of my stomach and the feeling of anxiety that comes when everything you touch goes wrong and you are deep in the red, knowing that you need to somehow make your losses back. The right mindset and being disciplined can help you regain control and relieve some of the stress associated with the swings between these two scenarios.
One of the most common mistakes people make is to start over-trading when they have lost money, in an attempt to make good on any losses.
This is an emotional reaction where traders start looking for opportunities that may not be there in an attempt to somehow recover from losses on any given day. It is the most common mistake made by novice traders and one that needs to be resisted.
Think of trades as being like London buses, sometimes an opportunity may not present itself for some time, and then two or three will come along at once.
Remember, there will always be another trading opportunity, so don’t chase after opportunities that are no longer profitable. Another important thing to remember is that being square is also a position.
This is why I have always said it is not the good days that tell how adept someone is as a trader, but it is how one recovers from a particularly bad day that shows what one is made of.
How do you react to a bad trading day? Do you become tentative and allow your emotions and anxieties to cloud your trading decisions, while second guessing yourself at every turn?
Remember that prices are driven by the human emotions of hope, greed and fear. And in the words of the philosopher Schiller, “anyone taken as an individual is tolerably sensible and reasonable, but taken as a member of a crowd – he at once becomes a blockhead.” Traders and investors are no different. As a trader, you need to be able to trust your own skills and instincts, so you don’t get swept away by the crowd.
This is why the use of technical analysis in to your trading is so valuable – it allows you to set fixed rules to your trades. In this way your trading decisions are based on fact, not emotion.
It is a variation of the theory of the madness of crowds and technical analysis allows the trader to take a step back, in order to tame the madness.
At the end of the day it’s all about the choices you make. What is most important to you as a trader is not what the crowd thinks, but what you think!
What’s more important, going with the crowd and being collectively wrong, and finding commiseration in your losses, or making your own decision and being right when everyone else is wrong?
It’s a diffcult decision to make and can be traced back, in most cases, to our school days when all we wanted to do was fit in. At the end of the day, we all want to be liked, and we know that anyone who was different was singled out, which makes it diffcult to go against popular opinion, unless you are extremely self-confident.
This is why technical analysis is so useful. It attempts to take the emotional aspect out of trading decisions by applying some form of order to the chaos.
What I have learnt over the years, through reading books and attending numerous seminars on the subject of technical analysis, is that newbies to Technical Analysis need to develop their own style and not copy somebody else’s.
To be able to do that though, they must understand the basics of Technical Analysis and how all the different aspects of the subject tie together. All too often I get asked how to use a MACD or RSI when the user has absolutely no idea of the concept of trend, trend lines and support and resistance.
Trading markets is a discipline like anything else; there is no short-cut, no quick fix. If you want to learn to interpret charts then you need to understand the thought process, or psychology behind the markets.
To be successful it is important to learn the basics and build upon those basics in a stage by stage process.
It’s a slightly more structured approach than some people might like, but it is necessary.
Learning about MACDs and RSIs is like trying to build the first floor of a house before you’ve laid the foundations on the ground floor.
Building on the basics and expanding your knowledge through experience and on-going research will give you a solid grounding in Technical Analysis that will ensure you approach each trade with the right mind set and a disciplined, constant approach.