To succeed in the financial markets requires you to overcome lots of psychological barriers. Most common are various forms of biasses, like confirmation bias, overconfidence, reducing regret among many others. What I find fascinating, is also a few paradoxes that you encounter as an investor or stock trader. If you are aware of these, you’ll get a better chance of winning. I am sure there are many more, but let’s look at two of them:
1. You should be present. But you should also stay away.
Unless you let someone else run your finances, you are a key component in making decisions and executing trades. At the same time, you are also your worst enemy.
It’s funny because you need to be in front of that screen to place orders and follow your results. And this is where the paradox becomes clear: I believe the results you’re getting in the long term, are negatively correlated with the number of hours in front of the computer you let yourself have. The best example of this we’ll find looking at so-called ‘full-time’ traders. Most of them go bust, and a common denominator is a heavy dedication to screentime they all share. My best advice and experience: Buy and sell the stuff you’ve planned, and log out! If not, I bet you’ll find a good excuse to do something stupid if you look at the charts a few minutes more. It’s a delicate balance.
2. If you try to make money, you’ll lose money.
Consider this scenario: You are very hungry, but the more you’ll try to make food the hungrier you’ll get. Well, this is exactly how the stock market works. So the paradox exists since everyone’s ultimate goal is to make money, but the more you try, you’ll lose all the way. How to deal with it? In my experience, this concept can be mastered if you treat profits like a bi-effect. It’s simply a result that will come, as long as you focus on protecting your capital and playing defense. Not losing money should be your first priority, as well as your second. As Warren Buffet puts it: Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
I could not agree more!
Cut your losses and wait for the rest.