Even the most successful investors manage their emotions with great difficulty. Before getting into the how’s, it’s important to discuss the why’s. It’s also important to discuss the difficulties and the consequences of failing to manage emotions.
Manic Recession: How Bubbles are Burst
It’s pretty difficult to forget the housing bubble that began in 2007. The aftershock of the bust would last for the next 5 years. What’s not apparent to many is how bubbles are generated in the first place. Technically speaking, a bubble is characterized by a situation in which the value of an asset is priced well above its intrinsic value. It may not be evident at the time, what the intrinsic value of an asset is, since value tends to be subjective in nature. It’s largely only after the bubble has burst that investors realize the mistake they’ve made.
According to Forbes, one of the key characteristics of a bubble is a sort of mania and euphoria that erodes all grounded sense. Bubbles are characterized by an investment frenzy in which investors seem to have suspended their critical reasoning and disbelief. Actually, this happens very often, in different markets, and it led to the housing collapse of 2008. The collapse, however, began much earlier, in 2006, when real estate values began skyrocketing, and loans were easy to come by. More and more investors started backing housing loans for unqualified applicants. Today, housing loans are much more difficult to get, and the standards for getting one are much higher. That being said, real estate itself remains a valuable asset. In this case, the damage caused by the bursting bubble was nearly catastrophic, resulting in a nationwide recession, and the near collapse of other industries.
How Successful Traders Manage Slumps
It’s easy for even experienced and skilled investors to jump on a bandwagon when a large number of knowledgeable people are all completely confident that they’ve got their eye on the next big thing. But money isn’t necessarily made that easily. Successful traders accept the fact that the most important characteristic to possess is patience.
Trading, and especially day trading, is characterized by needing to make knowledgeable and informed decisions, often in the blink of an eye. Of course, emotions are going to factor into that, and of course decisions are impacted by emotions, and truth be told, that’s not necessarily a bad thing. Emotions help traders hone their instincts, but of course those instincts must be tempered with reason and knowledge.
Slumps and ruts happen to everyone. For traders that are just starting off, a bad trade can feel like a defining characteristic of what’s to come. If profits aren’t seen right away, it may feel as though they’re spinning their wheels and going nowhere fast. Such pressures, which are purely the result of a lack of patience, end up causing rookie investors to make rash decisions or shy away from investments their instincts are telling them are a good move.
The Practice of Patience
Patience is said to be virtue, but there’s also a practice behind it. Successful investing means not making decisions that are purely reactive, but that’s only advising an investor what not to do. It says nothing of what they should be doing. Patience as a practice can be employed actively and there are a couple of different ways to do that.
#1. Invest Based on What You Know
For those that are new to the profession of trading, it’s important to accept the many limitations of not having firsthand experience. Understanding the internals of the market alongside market trends is more than simply theoretical, and real-world experience is still the greatest teacher. All successful traders have been in this position before, and from experience, have come to understand a detrimental practice known as “chasing”.
Chasing basically refers to a practice where a novice investor will see a lot of movement on a certain stock or trend, and jump on the bandwagon. Chances are, the trend has come and gone by the time they realize it was there.
To avoid this, a good practice is to make moves that make clear sense to you. If you see a heavy amount of action in a certain market, or a certain stock, and it’s not readily apparent as to why there’s so much interest, then there’s a strong chance you’re chasing a trend that’s already passed you by.
#2. A Go-To Strategy for Executing Trades
Throughout the day, there are going to be multiple opportunities to execute trades that you’re comfortable with. But like so many other things in life, timing matters most, and this is especially true of executing a trade. If you execute the trade after the value has topped off, you gain nothing. If you operate apprehensively you will make a habit of gaining nothing. Again, patience here can prevent you from executing a trade too early. It will also help you recognize when the window for a successful trade has passed and prevent you executing the trade.
#3. Waiting for the Trade to Develop
Most trades are going to require some time to develop and it may not be apparent immediately if a trade was successful or not. A failure to do that could end up costing you a very large win. Trades must be given enough time to unfold and that requires an ample supply of patience. Again, trusting your instincts is key here.
The Bottom Line
Staying patient with trades is important, but it’s equally important to stay patient with yourself as you hone your instincts throughout your career. Even the best investors have failures that they’ve endured throughout their career, but they’ve learned from those mistakes, and become better traders as a result. Successful novice investors stay within their own knowledge base and build their assets by executing trades they know will work. They learn from their mistakes, and gain more comfort with the process. If you’re interested in learning more and executing some trades of your own, check out our webpage at Live Traders.