Trading The ultimate guide to trading shares for beginners - part 5 December 10, 2007 Adam Hamilton CPA, Zeal Research
Are you interested in trading in the stock markets? Do you have questions about getting started? You are certainly not alone. Almost weekly I hear from ordinary folks with basic questions about trading stocks. After addressing these on a consulting basis for years, I’ll outline some of the basics in this series.
Researching stocks fundamentally is straightforward, albeit arduous and time-consuming. And timing stock trades based on technicals is not difficult to learn. But the challenges of learning fundamentals and technicals are greatly eclipsed by the supreme challenge of sentiment, or emotions. Learning to manage your own internal emotions, while simultaneously becoming hyper-sensitive to the psychological state of other traders, is crucial to your long-term success.
Why? Virtually all trading is driven by two destructive human emotions, greed and fear. The great majority of traders who choose not to study the underlying sentiment aspects of their art are never able to transcend their own emotions. So they become trapped within them, careening from one irrational extreme to the next. They buy stocks when they share the greed that permeates the rest of the markets. And they sell stocks when general fear grows too great for them to bear. But this is the recipe for failure.
Greed only reigns supreme after a major upleg, when a stock is stretched far above its own 200dma. So a trader who buys stocks when he and his peers are the most greedy is going to get stuck buying high. And soon when the inevitable correction arrives, stocks bought high will rapidly bleed into losses. So if you want to buy low, you cannot buy stocks when everyone else is greedy and thinks it is a great idea.
Conversely, fear only grows intense after a major correction, when a stock falls to or under its 200dma. After such a long or fast decline is when traders as a group are the most scared and feel the strongest urge to sell. Yet if they succumb to temptation and sell at these times of great fear, they are selling low. If you want to sell high, you cannot wait to sell until everyone else is scared and thinks the time to exit positions has drawn nigh.
Despite most traders buying greed near highs and selling fear near bottoms, and losing money as a result, you can transcend this natural human tendency. To grow successful at stock trading, you have to learn to totally ignore your own emotions. When everyone else is greedy and it looks like a great time to buy, odds are it is not. In reality that is the time to sell. And when everyone else is scared and you are really uncomfortable and want to sell, it is not the right time. Instead that is the time to buy.
This is the essence of contrarianism, doing the opposite of what the majority is doing. The best time to buy a stock is when it is the most beaten up and you least want to buy it. And the best time to sell is when a stock is thriving and you absolutely don’t want to sell it. Trading is so challenging, and so many people fail at it, because it demands you do your buying and selling when you least want to. You have to be a black sheep, buying when most others are selling (fear-laden bottoms) and selling when most others are buying (greed-laden tops). Fight the crowd to win!
Although extraordinarily hard at first, thankfully like everything in life this gradually gets easier with practice. The longer you trade, the longer you suppress and ignore your own emotions, the longer you observe the emotional state of other traders, the more natural this becomes. Eventually you will approach the point of immunity from your own greed and fear, and then you will really start multiplying your wealth. It is a hard journey, but well worth it. Mastering your own emotions has countless benefits outside of trading too, as it makes you much easier to get along with.
CFD CENTRE
