Emotional attachment in trading will prevent you from making the correct decisions to make money and preserve your capital. Emotions cloud your judgement, and do not allow you to view market information objectively. Emotional attachment to stocks causes you not to buy and sell at the right times.
Traders who get emotionally attached to stocks they own often turn into bag holders, as their emotions prevent them from respecting price action. Here are three reasons why traders develop emotional attachment to their stocks, and how to avoid them:
The most common cause of traders’ emotional attachment is trading with too much size. They are trading with money they cannot afford to lose. We talked about it in yesterday’s article. You will bring in a lot of emotions into your trading if you are trading with a significant portion of your net worth. You are going to be very emotional in a trade where you are risking the money that you need to pay your rent. You should never risk money that causes you to change your lifestyle.
Contrary to what new traders might think, decreasing size will actually end up making you money from your trading. When you decrease size, you worry less about the money, and as a result you trade with less emotional attachment to the capital you have in the market. When you have less emotional attachment to the money, you will be able to make trading decisions based on your plan.
Focused On Money, Not The Market
Even traders who are not risking huge suffer from emotional attachment because they don’t want to lose money. They are so attached to their money that they panic everytime the market goes a bit against them and they are down money temporarily. As a result, they can never hold a winning position long enough because they panic sell or cover every time the market makes an inevitable move against their position. They are worried about the money they have in the market instead of the signals the market is telling you.
No stock goes straight up or straight down. A stock moving against your position does not mean that you are wrong in your trade thesis. In trading, you have to risk it to get the biscuit. You rarely make $1000 in the stock market without risking at least $500 of the capital you invest. You cannot become a successful trader without risking money. Losing trades are inevitable.
Once you develop and execute a profitable trading strategy, you will make money in the long run. Losing trades are just the price you have to pay to make a living in the stock market. Remember this every time you are in a trade and you start to get scared of losing the money you have in the market. It will remind you to not get emotionally attached to the money you are risking, and let the trade play out.
In Love With The Company
Successful traders trade the ticker, not the company. Losing traders fall in love with the CEO, the companies product, their team ect. As a result, they stop respecting price action, and hold on to a losing trade because they are attached to the company itself. They believe that the supposed “good fundamentals” are an excuse to hold onto a position that they are down 40% on.
Successful trading is the result of respecting price action, not because you buy companies you like. Just because you love Sears’ mattresses does not mean you should buy their stock. If you did, you would be losing a ton of money as they are going bankrupt.
The reverse scenario is shorting a company you don’t like.This is quite common with small cap stocks. Losing traders short just because a junk company is up 100% and they think it is going to 0. It then goes up 200% and the traders account is gone.
Never become emotionally attached to the companies you buy or short. They are all just charts on your screen. Do not let your emotional attachment to the company dictate when you hit the buy and sell button.
If you missed Day 2 where we discussed gambling in trading, check out the article here.
We are doing a free web-class on December 17th where we will go over emotional attachemnt, and all of the 7 sins in even more detail, show exactly how to overcome these and, build a bulletproof mindset. Mark it on your calendar and join us live.