A Lesson in Trading Psychology
Trading psychology is a problem every investor faces. In short, you get in your own way, and you let your emotions get the best of you. You panic. It can be because of greed or fear. For me, it usually happens when I get scared out of a position too early. Let me share what happened to me in a trade this year so you don't make the same mistake I did.
Feb 2023 - NVIDIA stock is at $204. Banks are failing left and right. The federal reserve is hiking the interest rate, which typically precedes a recession. The stock market is in turmoil. I got scared that everything would drop like a brick, so I sold. Out of 100 NVIDIA shares - worth $20,400 at the time - I sold 80.
Mar-Apr 2023 - The market comes back to life. Concerns about the banking sector were greatly exaggerated. Hot stocks from the AI (artificial intelligence) boom like NVIDIA march upwards.
May 24th 2023 - NVIDIA releases an incredibly favorable earnings report because of the AI boom, and the stock jumped 26% the next day to $380.
June 2023 - NVIDIA becomes worth 1 trillion dollars, joining only a few other companies ever to hit the $1T market cap. As of this writing, the stock is at $435.
So if I had not sold anything, the original 100 shares would be worth $43,500. Instead, I am left with $8,700. Yes, boo hoo, those 20 shares are still up significantly, but had I not made such a rash sell trade, I would be much better off. Controlling your emotions can be incredibly difficult when buying and selling only takes a few clicks.
Trading Psychology Management Strategies
- Sleep on it: Write down what you want to do, and don't do it until the next day. If you still want to do it the next trading day, place the trade then. Try to invest, not speculate.
- Trade on a schedule. Plan to rebalance your portfolio once a year and only trade then.
- The easiest and safest approach: Don't worry about buying individual stocks. Use dollar cost averaging to consistently invest money into index funds and other passive investment vehicles.
The takeaway here is to keep your emotions in check at all times. Don't gamble like you're in Vegas. It's really easy for your emotions to get the best of you. Have discipline, and don't make rash decisions. But even if you do mess up, keep in mind that everyone makes mistakes. 😉
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