Fear and Greed

One of the most important aspects of successful trading is the Psychology of Trading.  

Without a plan, investing in the stock market is haphazard. 

Without a plan of action, traders must "wing it" as the market makes its moves. Wouldn't it be great if you had a play book that told you how to find stocks, how to place them on a watch list, how to apply chart indicators, when to get into a trade, and when to get out of a trade?  

You bet it would. 

Fear and Greed

These are the two emotions to watch out for!  

When someone gains good profits in a trade, the tendency is to allow these two emotions to run wild. That trader may feel greedy and stay in the trade too long, always hoping for a little more. Or greed's cousin, fear, might take over instead, telling the winning trader to "Hurry and get out before we lose any money."

How can you fight off these two saboteurs? You may have guessed by now... with a plan.  Here is how we approach this.

• First, I have developed a simple way to screen the Stock Market for the kind of stocks that have the best chance to make us money.

• Then according to two simple rules, we place certain of the screen stocks on a watch list.

• We now apply technical analysis of the charts to these stocks to time our entry.

• According to money management rules, we then decide how much money to put in each trade.

• Again, with technical analysis rules, we exit the trade.

As the Roman Legions went about the world conquering, engineers followed and, among other things, placed marker stones along the roads at one mile intervals. These were referred to as "Milestones."

There are milestone events in each of our lives. 

Concerning trading, there are several that are burned in my mind. Years ago when I made my first option trade, one of these milestones was created. The company being traded was Eli Lilly, the pharmaceutical firm. 

I purchased 10 call options (you'll learn more about these later) to open the position. Within 12 days, the price of the options had tripled! 

That means for every $1,000 invested I then had $3,000. What could be wrong with that? Here is what happened...and it was a shock.

After realizing how much money that little trade had made already, it was hard to sleep. 

I was preoccupied and anxious. Why? Because my mind started playing tricks on me. 

One voice would say, "Hey don't get out of this trade, you could make even more tomorrow." That was greed talking. 

Another voice would reply, "If you don't get out right now, you will lose what you have." That emotional voice was, of course, fear. 

This went back and forth for three days and nights. Finally I just got out of the trade because I couldn't stand the noise of these two annoying voices arguing in my head anymore.

After that experience, I realized that if I had had a rule to tell me how much profit is enough, then that winning trade would have been so much easier and fun.