Contributor Since 2009
When it comes to making decisions, our minds tend to perceive and react to the information available to us, each in its own particular way. This is not something we think much about. It is a part of each of us. Trying to change this natural process is almost impossible.
This is usually not of any consequence in our everyday lives, but in the realm of investing, our perceptions and reactions, and the emotions they generate, are very often the opposite of what is needed to be successful.
How do we start making consistently correct trading and market timing decisions? How do we make decisions without emotions interfering? How do we trade with confidence?
The answer is simple. We follow an unemotional trading plan which keeps us on the path to profitability.
Many traders, market timers, investors have no plan at all. They are like the proverbial gunslingers of the old West. A news event causes the market to decline and BANG, they sell. An economic indicator comes in better than expected, the market rises, and POW they buy.
Trading by emotion, they make trades that seem solid at the time, and they hold that position until it becomes more painful to hold it than to not hold it. They may even make an occasional profit.
But that lack of focus...lack of planning, will ultimately lead to poor performance, and to outright losses.
Why do so many traders sell at bottoms, and buy at tops? It is such a well known fact that it is almost funny, except when "you" are the person at that top or bottom.
Have you (or someone you know) ever said, "well.. I finally decided to go long (or short), so expect the market to reverse on me... again." Actually expecting "ahead of time" that the trade will be unprofitable.
You will not hear that from someone following a trading plan. He or she knows that not all trades will be successful, but that following the plan will avoid emotional trading errors, and lead to long term profits.
Trading (market timing) requires "discipline" ... Some have it, and others that wish for success must learn it.
The benefit of of following a proven trading plan is twofold.
First - if you have a plan, you'll be able to ignore all the data that doesn't affect your trading. The media is rough on traders - at any given time, you could find ten reasons to buy and ten reasons to sell. That emotional roller coaster is a nightmare, but if you are following a plan, you won't talk yourself out of good trades, nor will you keep yourself in bad ones.
Second - our emotions cannot cause us to make unprofitable decisions. We have a plan! All we need do is follow the plan. Never second guess it. That is allowing your emotions to come back into play.
Only through following a trading plan will you save yourself a great deal of frustration, and successfully grow your investments.