I decided to write this article because trading and investing seem so easy when we first encounter it. Surely it is just a matter of putting into practice what we have known all along. Buy a share, or shares, wait for it or them to go up, and when that is done sell them to someone else and sit back and relax.
Feeding that belief of course are images and tales from Wall Street, The Wolf of Wall Street and Money Never Sleeps. These men and women never lose money and they know exactly when to buy and when to sell, and then it is off to swallow loads of champagne and caviar.
I have worked in the Foreign Exchange trading business for many years and one thing that distinguishes this bunch of traders is that they are more likely to have spilt lunch down their shirts than any other living creature. They are also more likely to admit that they have lost money on more occasions than they would like to remember. That’s probably an important point to remember, as anyone who says they have not lost money trading is a liar.
Anyone who has any experience in the market will tell you that deciding when and how much to invest in the market and when to sell those investments is difficult. Because of that, we should all observe a few rules or guidelines so as not to make that even more difficult for ourselves
All of us should have an investment plan as a starting point. If we don’t know where the journey of investing is designed to take us, how will we ever judge how successful our investments have been?
Another thing that investing professionals will tell you is that successful investing is as much about conquering two overpowering human emotions as it is about constructing a profitable portfolio. GREED and FEAR are those two emotions.
Greed because you tell yourself that the only remaining possibility is for a share to rise in price, so buying is done without thought to risk management and the reasons that should accompany any investment decision.
Fear comes from selling a share or shares because the losses that you have made on your investment portfolio are too much to bear and that more often will mark the bottom of the market.
Either way through excess greed or fear, the level at which you enter or exit the market will almost certainly have a detrimental impact on your investment portfolio. Planning means that you will reduce the chances of losing money and thereby realise the maximum performance from your investment portfolio.
Next, every single investment should only be a small percentage of the total amount you to invest. You have to be able to suffer a loss, or losses, which will not end your investment life before it starts
In a calm way, study how the share price of the company you have chosen has performed over the last six months or a year, taking into account any company changes that have occurred such as management appointments or threats posed by the entrance of new competitors in the marketplace.
Do not watch the market ticker or trading screen when you are doing this!
When you have done this work you will have a much better idea of what is an expensive price for that share, rather than just getting in because your money is burning a hole in your pocket. A word of warning though. If a share price is falling that does not automatically mean it is now good value. It may also mean that there is a very good reason why other traders and investors are selling. Take the time to find out why.
Part of investment plan is setting a target price for when you would want to sell the share that you purchased some time ago. Once again the most important things to consider are GREED and FEAR. Don’t be too greedy aiming for a share price that will pay off your debt at the end of the month. By the same token do not exit the trade through fear of losing any money, the first time it shows any profit.
Fear and greed, pride and hope are the enemies of profitable share investing and trading. Fear leads to panic and panic leads to very poor decision-making. Greed leads to unreasonable expectations, as you are not going to make enough money to retire at the end of the month. Pride will prevent you exiting a position when market conditions have changed and all your trade planning is thrown out the window. Hope is an emotion that comes to traders and investor when in fact there is none. This will end up in tears and not of joy.
The truth behind my next and last point is absolute. As an investor the chances of buying a share at the lowest price in the last 100 years is so small that the possibility should not even enter your head. Entering at the right time means that you have the ability for a small or medium sized loss without breaking out into a cold sweat
Where and when to exit a position should have been made a long time before the trade was ever instituted. If you miss the last 5% of a market move then so be it. Don’t beat yourself up. That’s life.
Good luck, work hard, plan diligently and do not put yourself under pressure with unreasonable greed and pride. If you do that you will have nothing to fear leaving you only with hope.