Having a sound financial approach with disciplined money management contributes to investment success. The execution of a trading plan with consistency is challenging in the volatile real world market environment. Having the proper attitude and mental approach doesn’t necessarily improve results, but often negative psychology hurts performance and the implementation of that disciplined plan.
Trading rules for entering the market can be based on fundamental information that meets personal investment criteria. In addition, specific price chart patterns and indicators from technical studies can help identify trading candidates. These entry rules develop a mechanical methodology within an investment approach.
Dynamic market conditions contribute to investor fear and greed which unfortunately impact the decision process. Making and losing money has major effects on investors that are often difficult to manage.
The exercise of trading discipline is tough to maintain with the numerous fantastic opportunities every day, week and month. Investors often “chase” the markets and violate their objective evaluation criteria. This fear of missing out can sometimes override the best prepared entry rules.
At the same time the inability to take losses is also at work with a belief that an investment eventually will perform as anticipated. This can also apply to profitable situations with euphoria clouding sound financial judgment. Even when goals have been met it is emotionally difficult to exit and miss out on further opportunity.
Individual investment performance may not be a reflection of personal intellect, but rather the ability to keep the emotional impact of the markets to a minimum. Most of us are conditioned to think that hard work and hours of effort are rewarded monetarily. The manner in which a trader handles pressure and the stress while sticking to a plan can be more of an indicator of success than anything else.
Investors and traders sometimes are not adequately prepared to handle unavoidable losses. Using good risk to reward ratios and solid money management can decrease the probability percentages necessary to be profitable overall. However, losses are a reality in investing and their emotional impact needs to be minimized.
Just as the odds when flipping a coin is always 50/ 50, each individual investment is an independent event. Mathematically, there is no increase in the chances of getting heads after a run of nine tails in a row. Ignoring this fact brings a gambler’s mentality into play. Investors have to be aware that their past performance has no impact on future trades.
A string of trading winners or consecutive losses can lead to lack of discipline and effective plan implementation. The “hot” trader is often careless, while an unsuccessful investor may try to make adjustments midstream to over consummate. If a trading plan is truly ineffective, it must be reworked. The fact that the last trade lost money should have no bearing. An evenhanded emotional approach in all instances often leads to better results.
Out of frustration, we too often focus on ourselves as the reason for not achieving market goals. As individuals, it is difficult to understand that long term success is mainly a function of probability and money management. The number of times that we are right or wrong does not affect the total result. A positive final net number is the investment goal regardless individual trading wins or losses.
Losses are not a personal reflection of an investor but simply to be learned from. Managing a trade according to your rules and plan but eventually breaking even or taking a small loss should always be considered a success.