Ding, ding, ding! The stock market opens.
You monitor the stocks that you are interested to buy. You see green candles appearing everywhere. Boy, you’re excited! Before you know it, prices have gone way above your planned entry price yet you continue to hit the Buy button.
Don’t worry, you are not alone. I have been there and done that too. We have explored 3 ways to help overcome fear and greed in my previous post. Here are 3 more.
Have a trading plan
A trading plan is best written down before the market opens.
When the market is closed, all is calm. You have sufficient time to study the charts, indicators, news, decide which strategy to use and plan for contingencies. In short, a trading plan is a checklist.
Different market conditions require different strategies. Some strategies perform better when the market is in a nice trend. Others perform better in a wildly volatile market.
Having a trading plan written down helps to cover your base and keep you calm. While the market is open, you can always refer to your plan to help you make logical and sound decisions, keeping fear and greed in check.
Check for obstacles and be realistic
Obstacles in trading can come in the form of the next support/ resistance zone, earnings release date or major macroeconomic announcement which will move the markets more than usual.
The concept of support and resistance is pretty straightforward. Why are earnings release and other major macroeconomic announcements obstacles?
Such announcements are like the release of our O level results; they can be a pleasant surprise or a rude shock. No one knows for sure if the stock will shoot up or crash after the announcement. The price of a stock may even rise after a dismal earning report!
Never be too sure. Never be too greedy.
Trading is a business. Yup, you have heard that from me for the umpteenth time. Money (capital and cash flow) is the bloodline of any business.
It is perfectly normal to have a losing trade or a short string of losing trades. Having a small amount of trading capital is hence not advised. Granted, some of you may be thinking of starting off with a small amount to give trading a try. This isn’t the right place to test out your trading abilities. Starting off with paper trading is a much better idea.
Think about the commission fees in proportion to your trading capital and position size. It should be less than 0.015% of each position you trade (buy and sell combined). This should be in your trading plan too.
Your margin for error with an under-capitalised account is tiny. Why make your life tougher than what it already is? When a loss comes your way, you will likely want to revenge trade. That’s fear and greed in play. The stakes become extremely high.
Our mind likes to play with us. Hanging on for dear life when the trade goes awry and the fear of missing out can be disastrous if not managed. You will be better off managing your emotions with these 6 pointers (3 from Part 1).
You are at the right place to learn about trading and the required mindset. I wish you success in your trading journey!
Swim Trading Resident Columnist