Equity-TradingEquity trading (stock trading) elicits strong ‘gut feelings’ at some point in every trader’s experience. Sometimes those gut feelings are correct.  More often they are like that second piece of chocolate cheesecake…it seemed like a great idea at the time, but once it was done and over with, you realize it was a big mistake.

Equity trading is often approached by investors with no real game plan in mind.  They trade with their gut feelings rather then their common sense. They buy equity positions that are extremely risky and hang on to them as their values plummet because they have a ‘feeling’ that they’ll turn around.

Though this irrational behaviour should have no place in equity trading, everyone falls into the trap at times. When you’re trading equities, there’s no place for messing around with gut feelings.  Cooler heads must prevail.

Equity Trading Psychology

Two things drive much of human behaviour, especially in the marketplace, how we handle debt, and in business…equity trading is no exception.  These two things are:

  1. Fear
  2. Greed

Equity Trading: Don’t Be Afraid

There are many ways that equity trading elicits fear in the investor.

  • Equity trading is affected by fear of action.  Traders do not get into the markets until close to the top because they are afraid they will make the wrong decision.
  • Equity trading is affected by fear of loss so that when an equity is falling in price the investor holds on, fearing to sell at a loss.
  • Equity trading is affected by fear of loss in other ways as well.  Investors will often sell on a dip in the equities market before they have given their investment the time it needs to make gains.

Equity Trading: Don’t Be Greedy

  • Equity trading is affected by greediness when the investor has already hit his or her target for the expected gains from an equity, but hold on in hopes for more than their projected target, risking losing what they’ve already gained.
  • Equity trading is affected by greed when the investor tries risky investments that may have an outside shot of making it big, but are more likely to fail.
  • Equity traders who are performance chasers and are always chasing the latest ‘hot tip’ are driven by greed and emotion.

Why do most equity traders “Buy High and Sell Low” instead of the other way around?  Equity trading is controlled by the emotions of fear and greed for 99% of investors.

Train yourself to trade equities with what your head’s telling you, not your heart…and for goodness sake, do not make your decisions according to what most of the investors in the market are doing…if you want to take signals from the herd when equity trading, your best advice would be to run in the opposite direction.

Breaking The Psychology of Equity Trading

Using an advisor should help keep you on track with equity trading, though they are not completely immune to emotional decisions either.  The best way to make sure you don’t get caught up in the fear and greed cycle is to write down very specific “Equity Trading Goals” with every trade you make.

Keep a log of why you wanted the equity,  what trading strategy you are using, the size of your trading position, and the equity’s target price for when you expect to sell.  What if the target is reached and the equity is hot and looking like it will keep going higher?  Be disciplined and sell anyway…at least sell enough to get your investment back and take a healthy profit.

You can always hang on to a few shares in the equity and still have exposure to trading in a hot market where you can take some additional gains without compromising your disciplined equity trading strategy.  The key is to have all of this written in your ‘equity trading goals’ before you ever make the trade.

Equity Trading: Conclusion

Equity trading goals will be a little different for everyone according to experience and comfort level, and you’ll have to set yours based on the knowledge of the equity markets you personally have, or based on the equity trading experience of an advisor.  The key is that a little discipline in equity trading can save you lots of money, time, and stress.  It’s never a great feeling to watch what you ‘felt’ and ‘hoped’ would be a big win fade before your eyes.

Take profits when your goals have been met, and remember it’s never a ‘loss’ when you sell something for a profit.  You’ll miss some big moves higher, but you can be assured that you’ll miss even more big moves in the other direction as well…and that will put you two steps ahead of the majority of equity trading investors in the markets today.

Roderick MacKenzie is a top tier wealth education consultant.  He provides education regarding the financial, investment, and business strategies of the wealthy…equity trading is one of the wealthy’s strategies of choice.

Find out more about equity trading strategy for today’s economic climate at CrashProof Prosperity.

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