[caption id="attachment_2311" align="alignright" width="150" caption="Photo by Shahram Sharif"][/caption]
Learning is a continual process, not only because knowledge is limitless, but the environment always changes. I think it is important to capture and consolidate what I have learnt as a trader. So I will be starting a series of “Lessons Learnt as a Trader (so far)” to do just that.
Focus on potential loss, not potential gain
It is easy to be influenced by greed. When we decide whether to do something, we evaluate based on the benefits we are potentially going to get. For e.g., we invest to get profits, if not why invest at all. In other words, we are motivated by benefits.
This is where the problem comes. I tend to evaluate stocks based on the potential gains and not the potential loss. At times, I overexposed my capital or risking more than what I should be doing by adding too many positions. All because I felt bullish about the stocks. The key is nobody can be so sure that the stock market will go up the next few days, weeks, months or years. So the correct way is to focus on how much I can afford to lose and not be swayed by greed. As long as I sized my position properly, my trading account will not be wiped out. The priority is to focus on surviving and like what teacher says, “limit the downside and the upside will take care of itself.”
Adopt a Zen approach to trading
Humans are emotional beings. Psychological tests have shown that humans found more pain in losses than the enjoyment in profits. A person is more affected by a $1 loss than a $1 gain. As in, the intensity of emotions is greater for the loss than the gain even though they are of the same magnitude. This means that greed drives us to trade the market, but we become worried about losses after we have the contracts. All these emotions entangled with trading decisions jeopardize trading profits. Read more...