Have You Ever Fallen In Love With A Stock?
A new romance can be thrilling. The flirtatious glances, racing heart and weak feeling at the knees. When it comes to trading, it's best to keep your love life separate. Why? Falling in love with a trade can have disastrous consequences.
Have you ever fallen in love with a stock? If you answered yes to that question you aren't alone. It's very easy to become stubbornly attached to a trade and stick with it far after the initial blush of attraction has faded.
Hope is not a winning strategy
You've heard the saying "love is blind." It's all too easy to find and believe in reasons that a trade turned sour will come back your way. There is a psychological phenomenon called the "endowment effect" which essentially puts blinders on your ability to be objective.
If you've ever stayed in a trade longer than you should, you may have fallen prey to the endowment effect. Behavioral researchers have found evidence that people who own something essentially overvalue the worth of that thing.
Once you own something, an emotional and mental attachment occurs. Researchers first discovered the endowment effect through experiments conducted with simple coffee cups. Simply because people owned the coffee cup they demanded significantly more when asked to sell the cup, versus if they did not own it.
Apply this to stocks
The endowment effect means it is very easy to overvalue the worth of any stock positions that you may be holding now. The fact of ownership creates a psychological bias that makes you believe it is worth more. And, it also means it may be a little harder to sell something even when a position goes south.
Don't get trapped
Here are three ways you can overcome this mental trick:
- Consider new information about your stock or trading position. What's changed since you entered the trade? Have earnings come out or fresh company news? The endowment effect creates a natural tendency to stick with your original position, even in the face of new information. Take a step back and consider how the new information could change the outlook for the trade.
- Be willing to look at negative information. The endowment effect creates a psychological bias towards the sunny side of the street. The glass isn't always half full and negative news could mean the outlook is changed. Force yourself to take a step back to review the trade objectively.
- Write out a trading plan that makes sense for you. Then follow it. Take the time to develop a well-thought out business plan and detail the types of trades you will take, what criteria is needed to trigger entry points. How will you calculate targets and stop-loss levels. What will trigger an exit from a losing trade? Successful traders know where they will exit a trade (on both the winning and losing side) before they enter the position. Read more on the importance of stops here.
You can generate consistent income from your trading
If this sounds like some work, well, it is. No one ever said trading was easy. But, I'm here to tell you - Yes you can turn trading into a successful business!
Take the time to learn and then practice what you've learned. Just like a professional athlete practices his sport day after day after day, you need to practice your trading strategy in a disciplined and well-defined manner. Come trade with me in You can watch trades placed on screen in a live account and receive mobile trade alerts sent directly to your phone.
Sure you will make mistakes and have some losing trades that is why stop-losses are so important. If you structure your risk/reward properly on each trade, you can learn from your losers without having them distract your P/L.
It has been said if you are looking for a thrill go ride a roller coaster. Successful trading, is well to put it bluntly, a bit boring. Traders who approach the markets, like the business that it is, understand trading is not the place in your life to seek out excitement or romance. However, once you find a trading approach that works for you and begin to pull in regular income, it can be pretty fun watching your profits grow.
Hundreds of traders have completed my options courses and are now successfully implementing these profitable strategies. Join us today and learn how you can get to the winning side of your P/L column now.
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