Updated: Aug 25, 2021
When we're trading, we always look for great results, Quick!
It is this kind of mindset that makes no money for us, and even lose money too.
When it comes to stock trading, one thing we have to keep in mind is: You are the risk.
Step 1: Eliminate you from the trade.
You did weeks of research on this particular stock, learned it's business, it's leadership, it's market price, it's P/E, P/B, and ROE. Finally, you decided to purchase $10,000 worth of shares.
You have a great plan for this stock! You are going to hold it for 2-3 years, which is when the stock will finally reach it's desirable price level, and your plan is to make a nice 100% profit.
Two weeks after you bought your stock, there is a new story on the stock. It's CEO just resigned! The stock fell 5% in one single day, and looks like it's going to drop even more.
You thought to yourself, let me sell the stock for now, and buy it back when it's at a lower price. Mr. Market would say this is a smart move, and obviously you are going to make more money when you buy in at a lower price.
You sold the position, even thought you loss $500.
Two days later, the company hired a great CEO! with the positive news, the stock bounced back, and it is now trading at 10% higher than your original price.
If you can relate to this story, you are not alone.
Many of us have been tricked by Mr. Market the very same way.
We've no confidence in our stock picks. When there is any sharp movement in any direction, you dig around to find a reason to support it. Even though, there is no particular reason for it.
We change our position so much, and very often miss the entire bull market. Therefore, "You" have to be eliminated from each of your trades.
"You" are not allowed to touch a stock after you placed a position prudently.
Understand that you are the risk factor, because "Your mind" is a very unstable entity, and it is most easily manipulated.
"You are your own worse enemy! So don't touch your stocks."
Step 2: Plan Your moves.
When it comes to stock trading, you DO NOT want to wing it.
You need to plan your moves like in playing chess.
What would you do when the stock drop a certain percentage. What would you do when it's price rise sharply? When would you take profit? Do you reinvest your dividend?
All of these questions need to be answered before ordering a stock, so when it actually happens, you don't have to think under pressure to make split second decisions you'll most likely regret later.
Many traders purchase a stock without having a good idea of what to do with the stock they purchased.
When to sell, or how long to keep it.
Get some clarity on it!
Think of why you purchased the stock, and how long do you intent on keeping it and what makes the company desirable or undesirable later on.
What are the risks, and what would indicate the company is no longer a viable investment.
Step 3: Calm Your Mind, and Think.
If you can't stay calm when the stock price is going up and down, do not invest. Because, the stock market already have enough people like you who is losing money, it doesn't need more.
If your heart is pounding at 150 times per minute when you saw the stock you purchased is dropping in price, you need to take a chill pill and keep your hands off the stock.
When you are nervous, or in a frightened state, you make shitty decisions. Therefore, don't make any decisions when you are not completely calm.
One excellent way to keep calm is meditation.
When you are worried, scared of losing your savings, and maybe excited to close the deal when your stock is making $200 in profit. Meditate.
When you are meditating, you are more calm, and therefore, think better, and make better decisions.
Mother nature have given us a ginormous brain, use it more often!
Step 4: Have Clarity.
Understand the real reason that stocks move in a certain way.
In many situations, stock moves are driven by psychological instability of the human mind.
Fear, anxiety, excitement.
Understanding these kind of movement is part of a stock market. Use it to your advantage instead of falling victim to it's moves.
People's tendency to follow others in buying or selling a stock is the reason that we can buy great value at low price.
If everyone is perfectly reasonable like in a real estate market, it would be extremely hard to get a discount on stocks.
See stock price drop as an additional chance to purchase more shares instead of being worried. (for example: You purchase ABC stocks at $100, and now it's trading at $90. You should purchase more shares instead of worried that it'll go lower)
Step 5: Stocks always rise.
You have invested in the right company, at a very reasonable price, but the stock stayed in this price range for 2 months already.
What do you do now?
Stock price rise when Mr. Market think the company is undervalued. however, nobody knows when.
If the stock you purchased is a great company, and the price is low. Why are you worried?
The market price of a stock is a reflection of it's value, and if the value is growing steadily every day/month/year. Why then, you worry it's market price stay low?
For example, if a company's earning is increasing from 20P/E to 5 P/E, how long do you think the market price can maintained this low for?
If the same company's value stayed positive for another quarter, and it is now trading at 1 P/E,(which means it can make 100% profit per share) do you think the price will remain low forever? Extremely unlikely.
That is why we always buy a company for it's current value, a company that is already great, not its possibility of becoming great in the future.