4 tips to help you overcome psychological barriers to profitable trading
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Speaking of risks, why are financial instruments so risky; yet it’s all about buying low, and selling high? Why do so many people lose? The answer lies in the psychology of trading. Many people don’t understand that trading financial instruments is more about mastering the psychology of trading, than it is about your understanding of finance and economics. In case you are struggling in the financial markets, here are some tips that can help you avoid selling when the market is in the red, and holding onto investments until they lose their value.
1. Don’t overleverage yourself
Every year, statistics show that a majority of people trading financial instruments lose, yet a good percentage of them are usually right on the market direction. What causes this? The problem lies in the leverage one uses. While leverage is good, and can help you make lots of money with a small amount of capital invested, it can also lead to massive losses in case of a market reversal. That’s why many people end up selling when the market is falling, just to try and cut their losses. To avoid making these mistakes, use a leverage level that gives your trades some breathing space. Breathing space in the sense that the market can retrace a little bit, without putting a dent to your capital. This way, you can withstand a market drawdown without losing a significant chunk of your capital. As a rule never leverage yourself to more 10% of your capital. A higher leverage might look good, but if the market corrects, and it always does, you will get fearful, and most likely close out good trades at a loss.
2. Don’t invest what you can’t afford to lose
This is one of the primary rules of investing that everyone knows, but many overlook. In fact, every financial trading platform carries this message as a caveat to investors. Have you ever taken time to ask yourself what impact this simple statement has on your investment decision making? Well, its impact is massive. Let’s make it simpler by way of illustration. Assuming you have $1 million in your bank account and you decide to invest $50K. Chances are that you won’t feel the need to keep checking your trade, just to see whether it’s going the right way or not. You can even leave it for a year. But that would not be the case if you took all the $1 million and invested it in the financial markets. The anxiety and pressure this decision will put on you will trigger you to sell at the slightest sight of a market correction. That’s because you will be afraid, and rightly so, of losing all your money; or a significant chunk of it. If you are tired of liquidating your positions in losses, then you need to reevaluate how much of your net worth you put in the markets. Even Warren Buffet the world’ most successful investor says that if you can’t afford to lose 50% of your portfolio, then you have no business investing in the stock markets. Apply the same principle in all your financial investments and you will never close at a loss again.
3. Don’t develop an emotional attachment to any investment
This is the main problem that most cryptocurrency investors experienced in 2017. People bought bitcoin at $1000 in January 2017 and by December, they were sitting on fat profits as bitcoin hit highs of $20,000. But here lies the problem, some people didn’t sell; in the hope that that it will rise even further. Today, bitcoin is trading at well below its peak values. To avoid making this mistake again, you need to redefine your focus. In finance, your primary goal should be to make a profit and get out of the market. Getting attached to an investment hoping that it will rise further, even when it’s clear that the market is overheating, will not do you any favors. Get out once you have made enough, and come back another day, when the conditions look favorable for you to reenter the market. As a cryptocurrency investor, since that’s the market where people mostly get attached to their coins, always remember that you are not part of the coin’s developer team. The only connection between you and that coin is your money, and if you feel like you have made enough, or you are not making enough out of it, ditch it and buy another one. Even Charles Lee sold all his Litecoins at its peak, even though he gave some other reasons for the same. That’s a person who has a real connection to Litecoin, yet he made a financially savvy decision, and is now sitting on a truck load of money.
4. Don’t be swayed by the news
One of the factors that lead people to make wrong investment decisions in finance is the news. Anyone who has been following crypto news in January and February can attest to this. There was so much FUD around cryptos, that one would be forgiven for selling their coins at a loss, just to safeguard their capital. To protect yourself from such news, make sure that you understand the core fundamentals of the investment you are buying, before putting in your money. This way, even when negative news come out, they don’t trigger fear in you, and push you to sell a potentially good investment at a loss.
If you can adhere to the above principles, then you will develop the right trading psychology, one that will put you on a path to profitability in the long-run.