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Trading Psychology


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Most investors believe in healthy greed, and it seems like even people who haven’t seen the Oliver Stone movie Wall Street know that Gordon Gecko says that “greed is good.” But this old chestnut warns us that we can get too greedy, whether we are long or short on the market.

Remove Emotion from Investing
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We all have them. It’s what distinguishes us as humans. We may not want to admit it, but we all have emotions and attitudes that can and do impact our decisions for buying and selling stocks. These emotions can include: fear, panic, greed, arrogance, happiness, unhappiness, love, infatuation, and ego. These emotions often do an extensive amount of damage to a good investment strategy. At least with regard to investing, we would all be better served if we could remove these emotions from our psyche.

6 Different Investment Philosophies
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To be successful with any investment strategy, you have to start out with an investment philosophy that is consistent in substance and one that corresponds not only to the markets you  decide to invest in but your to your personal and individual characteristics as well.

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It is pretty apparent to most people who observe people act and react that they do a lot of what they do based on moderately primal and/or emotionally motivated impulses. Many experiments have been conducted to check the impact that primal instincts and emotion-based thinking has on investing and stock market psychology. They have generally proposed that when people are presented with ambiguity their emotions can overtake their logical thinking, guiding them to resist speculative propositions. This raises the challenging hypothesis that people who are less fearful than other people may produce more proficient investors.

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What kind of stock trader are you? There are a variety of personalities at work in the market, many of them self destructive. Ideally, you want to have aspects of each as a sort of personality disorder, but most of us are just one or another.

How to Take a Loss
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There are numerous people who will tell you how to make money in the market. But what you don’t often see, however, are ideas written on how to lose money.

“Cut your losers and let your winners run” is common stock market trading advice, but how do you determine when a position is a loser?

Short Selling – Is it Unpatriotic?
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Short Selling. Is It Unpatriotic?

Short selling is the opposite of normal (long) stock positions. If you buy a stock hoping it will go up, you are ‘long’ of the stock. But if you think the stock will go down, you can sell it first, and buy it anytime you please. This ‘short selling’ is a simple borrowing-of-stock process that is handled by your broker with no need for you to understand how.

Becoming a Full Time Trader
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So you want to become a full time stock trader?

This is the dream of many. The problem is that it is very easy to be wiped-out in the learning process. Some lucky people have the skills to make money from the stock market and keep it, knowing very little. This is because they are skilled at money management and taking risks. They know how to handle a risk – bookmakers generally make good traders because they are skilled and practiced at risk-taking and know how to handle it.

Overconfidence in Stock Trading
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People are overconfident. Psychologists have determined that overconfidence causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Does overconfidence occur in investment decision making? Public stock or security selection is a difficult task. It is precisely this type of task at which people exhibit the greatest overconfidence.

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If you havent already, it might help to first read the background on Overconfidence in Trading.

Psychologists have found that people become overconfident when they experience early success in a new activity. Also, having more information available and a higher degree of control leads to higher overconfidence. These factors are referred to as the illusion of knowledge and the illusion of control.


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