The Psychology of Trading

What a week!

Crude oil nudges towards $100 a barrel but can't quite put in a triple digit print. Gold trades at new highs and hits $845.60 on Wednesday and Thursday and the major indexes all tank.

Google the darling of the tech world finally blinked and drops $100 from its highs, and Apple and RIM slumped with the NASDAQ melt down.

If that was not enough, Fed Chairman Bernanke opened his mouth and showed how he hasn't a clue as to what is happening.

Now here's one guy who does have a clue.

Did John Chambers of CISCO fame create yesterdays tech meltdown? Nooooooooooooo, so what happened? Well. in a couple of words REALITY finally enter Dreamland.

So what's an investor to do?

The first thing to do is an attitude check from the neck up.

One of the most important tools you posses as a trader is your mind. Attitude can either make or break you as a trader.

To become a successful trader it begins with believing in yourself and having a winning attitude.

Everyone wants to be a winner; at least, they think so. Unfortunately, most are not willing to perform the tasks necessary to become a consistent winner.

Winners generally achieve success by being focused on a goal. Being focused allows winners to remain committed to the tasks at hand. Most winners perform a lot of hard work; including a willingness to deal with sometimes mundane duties. Most of all, winners perform with an "I am responsible for both my failures and successes" attitude.

So, where does the would-be trader start to become a success? By focusing on the tasks at hand. Most of all, treat trading as a business. And, as in any business, money management is critical.

Money management, next to trend, is probably the aspect of trading most overlooked by smaller investors. Man, by nature, is an optimistic creature and the amateur trader often acts instinctively. Unfortunately, this instinct or optimism is often the undoing of the smaller trader.

When a person enters a trade, he does so with the hope it will be a winner. When the position goes against him, he keeps thinking (or hoping) "it will come back." He knows he should have a stop in place, but hope keeps telling him to stay just a little longer since everybody knows "you always get stopped out the day the market turns." Eventually, hope turns into frustration, desperation and, finally, panic, prompting the trader to issue a GMO (get me out) order.

If the trader hasn't learned his lesson by this point, he develops the "I have to get it back" syndrome. He generally rushes into another poorly planned trade, throwing good money after bad.

Winners show several different characteristics. They enter the market knowing they can be wrong and, in fact, are wrong as often as they are right. They have learned markets don't run on hope. They understand markets tell them when they are right or wrong. When a trade is losing money and getting worse, the market is telling them to get out.

Bad Trades

A bad trade is like a dead fish: The longer you keep it, the worse it smells.

Good Trades

When a trade is making money, the market is telling them they are right and to let the position ride.

Don't ever do this ...

Winners don't add to, or "average", losing positions. They dump the trade and go looking for a new opportunity. Successful investors may add to the winning trades. When ahead, they press their advantage while remembering that at any time the market can turn on them and prove them wrong.

It trading keep your mind clear and do not get emotional about a trade. Remember you are not married to a stock rather you are in the dating game.

Next week... it's a surprise.

Have a great weekend and a super trading week.

Adam Hewison