Emotion and polar-opposite Logic signposts

Is it fear, your ego or your emotions?

For many traders and investors, their emotions influence their trading which can often times have a negative impact on results. Learning to control emotions and be disciplined enough to create and use a strategy consistently, even through a losing streak.  A trader that is influenced by ego rarely admits they are wrong. Ego can get in the way and cause the trader not to close trades when their strategy dictates they should.

To avoid emotionally influenced trading, here are some simple rules that will help you move towards your trading goals and objectives.

  1. Decide on the amount of cash that you wish to devote to stock trading/investing. Few decide on this in advance. You should know now, “if you don’t know how much cash you have in your account, then you can’t size your positions correctly. If you don’t size your positions correctly, then you are gambling and not trading”.
  2. An easy and effective way to accomplish this is to divide your cash into ten parts and never put more than 10% into any single investment/trade. Then resolve to follow the VectorVest stop-loss without hesitation.
  3. VectorVest recommends investing in undervalued stocks that are rising in price with little volatility and that are growing earnings strongly and safely.
  4. Try not to have any more than 2 stocks from any sector/industry. This is a rule that I forgot earlier in the decade where I was very overweight in construction stocks.
  5. After purchase, please put your stocks into a watchlist and re-sort this Watchlist by Relative Timing (RT). Resolve to take action on the stocks at the bottom of the list when sorted by RT. When you own stocks, the only thing that matters is whether they are rising or falling in price. Re-sorting by RT places those stocks that are rising at the top of the resorted list and those that are falling at the bottom. It’s the stocks at the bottom of the list that require the work.
  6. Rest assured your ego will fight you all the way and come up with a dozen reasons why not to simply get rid of “sell” rated stocks. A “sell” rated stock is where the stock price of that stock has fallen below the VectorVest calculated stop-loss value. Tell your ego to take a hike.
  7. Your success as a trader will be determined by your ability to simply exit the losers quickly and unemotionally. Those of you who have traded a little will know that this is more difficult to do than to talk about. Holding on to losers is one of the four big mistakes that losing investors and traders make until they run out of money.

Having confidence in your trading plan and sticking to it will often have the best results. You must prepare to accept losses and accept that they are part of the trading strategy and just move on to the next trade.

VectorVest believes that every investment strategy should in theory, be worry-free. If you’d like to learn more about Worry-Free Investing, register for our online Worry-Free Investing Seminar.

David Paul
VectorVest UK Managing Director