3 Tips to Control Emotion in Trading Stocks

Peter G and his money Poker Face

How can you keep your cool and not lose your shirt?  Mastery explains.


We all want to find that 6 bagger or watch a stock in our portfolio increase by 300%. But you need to be real with yourself, and set realistic goals for your stocks.  Also, don't gamble on penny stocks.  If you are a penny stock player never put more than 1% of your total portfolio on the trade.  Never.  There are thousands of stocks to trade, hundreds of ETFs -- don't waste your time on penny stocks.  Banking 10% to 30% on a given trade is wonderful, don't get greedy.  Look for stocks in an industry you understand or work in, use your professional experience to your advantage. 

Stop from thinking you need to be an instant millionaire, it's just not going to happen.  Trade stocks for several years before you ever buy an option or sell options.  The more trading techniques and disciplines you have, the better.  Too often, novice investors get burned from the market and never return.  Many of them didn't spend the time to understand how earnings season work, what a 10-K is and how to read it, etc.  Watching Mad Money a few times does not give you the qualifications to buy and sell stocks profitably. 
Are you investing in a sector that is played out?  Did you buy Microsoft (MSFT) hoping the Zune would take over iTunes and the iTouch?  Again, be realistic and reasonable.  
This will allow you to keep your portfolio alive and not hemorrhage losses.  All online trading accounts allow you to set Stop/Loss Limits.  Set a trigger to sell your equities automatically should they fall 8% from where you bought them.  You don't need to keep bleeding, cut your loses without pressing 'sell'.  If your holdings are up more than 8%, take some off the top.  Book those profits.

Bender - Futurama MoneyYou need to be like a robot when you trade.  Don't get wrapped up in emotion. You are a investing for your future.  Keep your cool.  If you are on a losing streak, think about exiting all positions. Take some time off and go back to the drawing board.  Stick by the 8% rule, maybe for you it's 5%, or a mixture -- whatever.  Just stay true to your percentage over and under rules -- it will slowly turn you into a bad ass trading machine.

Making money is the best feeling in the world.  Losing money on your stocks is the absolute worst.  You can't keep trading stocks to make up your gains when you are desperate to make your money back.  Similarly, if you are batting 1,000 the odds are you can't keep hitting home runs - so don't lose all your winnings.

Keep a journal of your holdings, record how much your trades are gaining or losing on a daily basis and take notes every day on why you bought the security in the first place.  It's really not much work as you are already watching your tickers I'm sure every day anyway. Make use of Google Documents or be old school and keep an Excel Spreadsheet using MSN Stock Ticker Plug-Ins to refresh your tickers. 

Your mindset needs to be focused, not worried or euphoric.  If you mind is not in the game, you are going to lose. 

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