Stock Trading Psychology ? Fear and Greed

Stock Trading Psychology – Fear and Greed

As I look for Canadian Stock Alerts I always have to step back for a moment and check my emotions. Now on the surface this may sound silly, but and it’s a huge but, your emotions will kill your ability to invest properly.

Now just follow me for a minute. How many decisions have you made in your life, that you regretted later? When your were honest enough to admit the mistake, they were likely bad decisions because your emotions were engaged in the process. The emotions of greed or fear more specifically.

Emotions have their place don’t get me wrong, but never when it relates to money, and there are many decisions made that involve money besides just investing. Homes, cars, furniture, university choices, the list is endless.

So here’s where I’m really going. The emotions of greed or fear are absolutely controlling most investor’s decisions to buy or sell. And guess what? Most investors lose money. Why? Simply greed or fear. Greed let’s them blindly buy a stock that has no proper logic involved in the process. And fear forces them to sell a stock also without logic.

Now let me give you a real life Canadian example stock. On Monday May 11, 2009 OPTI CANADA INC (OPC.TO) opened at $3.41 down from the previous close of $3.69. This was mostly due to the overall markets being pulled back at the open. The Fear Factor would likely have forced you to sell quickly at the opening bell. A huge mistake! OPC.TO very quickly recovered and flew all the way to $4.41

OPC.TO was pulled down at the open of trading with the overall markets opening down, and not because it had any negative news of it’s own. Smart investors realized this and saw the pull back as a buying opportunity, and quite an opportunity it was. The lesson is simple: Don’t let emotions, especially greed and fear make decisions for you, stay on the logic side and you’ll always make better decisions.

Now here’s another Canadian example. Century Mining (CMM.V) are about to receive $65 million in financing to restart their Quebec Mining Project. That news sent the stock from .17 to .28 recently and then it gently slid back to .17 and all this happened prior to the actual news being announced. The greed chased it to .28 and the fear sold it off.

Did something change in the story after learning about soon to be released financing news. Nope, not a thing. The financing will be announced and the mine will restart. Century did their NI43-101 in 2008 and has already proven a great supply of gold. Actually it will keep the mine active and workers working for decades. So how could all this good news seem to fade in the actual stock price. Because the fear that the project may not start for 2 months .. now seriously, in the big picture, is that a real concern, of course not. But fear is a very over powering emotion.

So today, May 22, 2009 smarter investors, are investing with zero emotion and are accumulating shares at .20 … the greed factor will kick in when Century Mining hits .40 and they’ll realize what they’ve missed.

Now, don’t get me wrong, you do not need a Ph.D to make money in the stock market! You only need to operate through logic and follow a process. The logic follows a simple process and that has to have zero emotional content. The logic or reasoning if you will, becomes a very simply equation or investing process.

And let’s also be clear, no matter how much logic we use and how little emotion we allow to creep in, no one can absolutely predict the markets. When the markets pullback hard and over correct, they present opportunities to those sitting on cash.

To anyone holding a particular stock, you might see a 20% correction in a single day, and that hurts! I assert, that if it was a value stock in the first place, it will rise again. If it was over valued, as many can be, it will find it’s new level of support at a lower level. So the logic here may have told you to sell with your 20% locked in, versus being greedy and letting it ride for too long.

What typically happens here is the stock is up 20% and your sense of “I can do no wrong” over rides any logic, but when the correction comes, the fear rises to the top and you sell at a big loss. The lesson is simple “don’t be greedy”. If a stock gives you a 10% or 20% profit in a short time, take it and be grateful.

You always want to be able to participate in a market correction and buy the opportunities when pullbacks occur, as they always will. You need available cash to do that. Getting stuck in a stock negates all this. I know this seems too simple, well then, keep it simple! Take decent profits as often as possible. These markets are highly volatile, things can swing in either direction quickly.

When I look for Canadian Stock Alerts, I look for two things and two things only. I want to find a stock that has a higher than usual volume of shares traded that day, and that stock has to have pulled back from a high also made that day.

The extra volume guarantees instant liquidity, I can get in or out easily. The pullback almost always wants to revisit the recent high made that day. If it doesn’t pullback, I take a pass, because it always pulls back. If not today, then more severely tomorrow.

Here’s a major rule I follow everyday, kill the noise and distractions that will influence your emotions. They being the newspapers, stock message boards, and TV mostly. The fear mongering or as Alan Greenspan called it “irrational exuberance” are alive and well throughout every media. They will play with your emotions and that alone affects your ability to stay clear and logical. Make no mistake, the media is a distraction! If you want an emotional rescue, turn the TV off and avoid the newspaper & message boards, especially throughout the trading day.

The greed & fear factors are to be avoided at all costs. Stay logical when investing and you will always make better-educated decisions.

Thanks To : assist 2 sell mutual fund sales

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Comments

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