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Courtney Smith analyzes the current situation in the stock market and suggests a strategy for making money in the market.
Stock Market Commentary Video - 11 August 2010
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All of the top traders I have met and read about say that psychology is the key to successful trading. I did not understand this until I started trading the markets full-time and had to come to terms with the emotional swings and internal dialogue you experience while in a trade.
I have learned more about myself since trading the markets full-time than in any other career I have undertaken. I can say now that it has been a wonderful journey of self-discovery and inner growth, but during the first year it definitely did not feel that way. I would like to share with you the psychological journey that I went through in my first year of full-time trading and the steps that I undertook in the following year to improve myself.
Before I started trading the markets full-time, I sat down and studied my motivations, set goals and determined what I thought to be my edge in the market. I knew that I was a highly organised, determined, motivated and goal-oriented person, so I felt that these characteristics would give me an edge in the market. However, I lacked patience and had a tendency to beat myself up after exiting a losing trade. Patience was elusive. I was always afraid of missing opportunities and the need to be in the market was very overpowering. I found myself attracted to options trading. Everything seemed to happen very fast with options – in only a day or two you knew that your trade was a winner or a loser. The only problem was, I did very well in my first few months of options trading and started to focus on money rather than on good trading. This actually caused me to overtrade, which is not a very successful activity in the market. These are some of the issues I had to learn to deal with as part of my psychological development as a trader. |
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There are a few trading rules that have stood the test of time and enable traders to trade profitably, yet a lot of people fail to follow them. The rules are no secret to anyone as you will find them in many trading books and other materials. The rules like 'cut your losses' and 'follow the trend' have worked for hundreds of years yet most people ignore them!
Money is something that affects people's emotions and your natural instincts with money will often encourage you to break some of the time tested risk management rules, for example 'cutting your losses' and 'keeping your trades small'. Most traders focus on making money and realising a loss goes against the aim of making money. Similarly, when you have a position that is performing strongly, a small part of you wants to sell that position to realise the profit. This is perfectly natural. Letting your profits run and not selling too early is also an important time tested rule, however because of the focus on money, some people can be very quick to sell shares when in a profitable situation. If you find it difficult to accept an initial small percentage loss in a trade, what makes you think it is going to be easier later on to sell the shares when the position has lost 30% or more? Yet, when you consider the influence of trends in the market and how important it is that you manage risk, the best time to sell the shares is when you are faced with only a small loss. |
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