Stock trading can be a very exiting thing. We love looking at our accounts in the morning and finding our investments significantly higher in value. The thought of making an easy $1000 here and there can be a dream worth pursuing. Affording yourself a comfortable lifestyle, and flexing your financial saavy makes you feel good about yourself. In the heat of the markets, it can be easy to start talking with colleagues about your latest investments ideas. You might even ask a fellow trader what they like about the markets. — Don’t do it.
Keep your thoughts and ideas about investments to yourself. Some of you right now have a puzzled look on your face, wondering how this has anything to do with making money in the stock market. The key here is understanding your psychology, or human nature. To make a long story short, talking about your investments, profits, and ideas can severely affect the performance of your investments.
Let us illustrate a scenario for you. You think you’re doing quite well in the markets, you’ve made profits on several trades. You feel good about yourself. Nothing bad here to be observed right? Well, you proceed to start telling friends about what stocks they should buy. You also tell people what you’re currently invested in. Then the market decides to have a major correction. A few of your positions are now showing a loss. Now friends start asking you about your investments. Because your psyche is so invested in having others perceive you as successful, there may be a moment you feel that you must prove yourself. This is where things get interesting.
The ego is a powerful thing. We as humans hate being wrong. It’s even worse when your peers point you out to be wrong. Continuing on with this scenario, you believe your investment in XYZ company going to recover so you foolishly decide to hang on when your system told you to sell. Things get worse, the market continues to trend lower. You can’t sell. You don’t want to be wrong. You don’t want your peers to know that you lost your nerve and sold out. You just want people to think you’re smart and cool. Bad move. Losses get big, and you bankroll just got smaller.
The point being made here is that self perception can cause us to veer from our strategy. All successful traders stick to their system. Having your ego or reputation on the line makes it hard to stick to your system. Again, don’t talk about your positions. The key to making money in the stock market is to have discipline in your financial decisions. When you decide to sell at some point, there should be no other factor affecting that hard rule. Every time you break a trading rule, you will pay sooner or later. Sure, the above scenario could have worked out in your favor. In the long run, breaking the rules can become a habit. Once that happens, you have no trading system. Without a trading system, you are gambling. – Gambling is for losers.