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Welcome to the Equities Section of Options Realm |
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. The article that I have decided to write for today has to do with an investors emotional state and how emotions can effect how efficiently investment decisions are made. I have decided to reflect how the movement of the investment I have held has effected my emotional state and then if the change in my emotional state has then effected my decision making ability. I am going to look at both when stocks are going up and when they are going down in value. Besides looking at my own experiences I am also going to look at what other investors and traders have said and done with regards to countering the emotional impact that investing causes. Personally, I have noticed that when I first started investing my emotional state made a big influence in my trades. At the beginning I was also second guessing myself. If a stock went up I wanted to sell figuring that it would go down just as fast. Then when a stock went down I always wanted to sell because I figured it would continue to drop. At this point in my investing career I was not making money because I was my own worst enemy. I was constantly cutting any winner I had short and I was panicking with every drop in price. This combination meant I was selling before the stocks had a chance to go up and if they did go up my profits were minimal because of my overtrading. Once I realized what I was doing and that it was costing me dearly I decided to take a much longer approach to investing which was to hold the stock for at least five months. The first stock that I bought after my new found idea was AHCI at 4.75. It proceeded to trade down under 2.00 a share. I was now holding a 50+% loser. At this point I reevaluated my position in AHCI and decided to double the amount of shares that I had of the stock. Even though I was down huge in this one trade I did not get flustered and because of that I was able to make the proper decision and come out even. I have since realized that whenever something I do not understand happens I need to reevaluate my position and act accordingly. After spending time figuring out what I have done in the past and seeing how emotions and being able to think rationally greatly impacted my investing performance I decided to see what professional traders said about emotions. I have read the biographies of many famous investors and have also read many interviews with professional traders. The one key thing that I noticed that kept coming up amongst the investors was if they did not understand why a trade was performing a certain way they would immediately close the trade. This aspect was something that almost every professional trader and investor shared. If they couldn't understand why something was happening then they wanted out. Another interesting aspect that many of the professional traders shared is that if they were having a losing streak they would scale down the amount of money being invested and if their results did not improve they would stop trading all together. This I found interesting because if displayed how once you become distressed it seems that the bad decisions pile on top of each other and by stopping trading for a certain period of time they were able to clean their mind and make rational decisions. After taking a look at both what has worked for me in that past and how the professionals deal with their emotions I have come to the conclusion that trying to keep an even keel is very important. Most bad decisions are made when you are either overly optimistic because of recent success or when you are overly pessimistic and disoriented because of recent losses. I also think it is important to really understand that it is okay to sell out of your positions and come back to trade another day when thinking clearly without any stress. |
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