How to think like a successful stock trader
It is true that financial analysis as well as the use of fundamental and technical analysis is essential to success in stock market trading. Any trader can use these tools but why are so few traders really successful? The answer lies in the fact that the most successful traders use psychology extensively in devising their trading plans and trading strategies. Here are a few tips on how you can use psychology to boost your success as a trader.
Panic is an irrational emotion that leads you to react irrationally, sometimes by selling stocks that you should be holding or buying stocks when you should not be buying. Panic is a natural human emotion and cannot be eliminated altogether but you can certainly learn to control it and to channel it into more productive ways… The really successful investor is not immune from panic but uses the panic to drive him into conducting further research and to devise methods to stay ahead of its competitors and the market. Making constructive use of panic is a good move. Don’t rush into investment decision but take a few seconds to weigh the pros and cons before making a trade. Learn to take bad news philosophically and avoid knee-jerk reactions.
Even if you are a long-term value investor who operates a buy and hold strategy, you should always examine short-term events that have an impact on the market. For instance, auto stocks look really cheap right now and some investors would be tempted to buy. However an imminent rise in oil prices can actually depress the value of the stock further and rob you of any potential profit. As a long-term investor, you should also be evaluating short-term events to determine when you should buy the stock.
You should always create a contingency plan or a fallback trading position in the case of unexpected developments. You don’t have to actually execute these plans but having them around is convenient when you need to react quickly. For instance, if you are a large investor in auto stocks and you believe that oil prices are going to rise, one possible fallback position as to buy some oil company stock. Similarly, if you own consumer product company’s stock and believes that buying in the US is going to decline, you may choose to pick up stocks of consumer product companies which largely sell overseas. The point of this exercise is to mitigate your risk to avoid a large downside.
There is money to be made in bucking the common trend but, as a general rule, you as a small investor are better off trading with the trend than against it. In other words, if you are looking to buy and the market is falling, you are better off waiting for the decline to level off and signs of a rise in prices begin to manifest themselves. That are always continuous possibilities in the stock market and you are unlikely to profit if you react without thinking against the market trend.