TRADING PSYCHOLOGY 101: RECOGNIZING AND CONTROLLING EDS
This article also featured on TheStreet.com The battle with yourself is never-ending. The more you become involved in activities that tend to press your emotional weak spots, the more you will experience inner-turmoil as you are delving into an area of the psyche that is uncomfortable being in the spotlight. Activities that involve speculation of any type, whether in the stock market, poker, sports handicapping or horse racing will involve diving into those emotional dark spots (EDS for the purposes of this article) on a fairly consistent basis. In fact, what is at the core of many traders or investors frustration during their first 5 years in the financial markets is the fact that they are not able to resolve the inner-conflict that develops when you probe those emotional areas that enjoy remaining shrouded in darkness. I'll give you an example of this conflict to illustrate the point. Let's say that you have Joe Investor. Joe enjoys trading and investing in the stock market on a regular basis. He has been at it for a number of years with mixed success. He is cognizant of risk, which has enabled him to avoid any stupendous blowups to date. He finds himself consistently getting into positions too late and out of positions too early. He trades based on a combination of technicals and fundamentals. Day 1: A trading opportunity arises in the stock of XYZ corp. trading at $15 per share. Joe Investor decides that there is an opportunity for 20% upside and takes a position at $15 per share during the first hour of trading. At the market close, XYZ corp. is trading at $14.90. Although it would have been nice to close the first day with a profit, Joe Investor remains comfortable with the trade. He goes to sleep that night thinking of how good it is going to feel when XYZ is trading at $18 per share. Day 2: XYZ begins drifting downward right from the open. This is beginning to make Joe uncomfortable, but nothing that is causing him a great deal of concern. Past mid-day, XYZ is trading at $14.35. The pressure is beginning to build on Joe Investor. His mind begins accessing his EDS (remember? emotional dark spots) creating great turmoil from within. Despite this inner-conflict, Joe takes another look at the chart and sees a great deal of support around $14.25. He sees that the CEO of the company was recently out with some very positive words. He takes solace in these two facts. He goes to bed that night thinking of how nice it will be to be able to get out at...