Several Quick Tips on Emotional Stock Trading

Buy low…Sell High

Sure you have heard of this right? But there is a strategy to it.

You cannot chase a stock.

You must take control of your conscience/emotions and stick to your plan and price target you’d like to purchase it at. Stocks rise yes, but they also pullback (meaning fall) as well. We saw this in 2009 with the Great Recession and we saw this in 2020 with the Great Lockdown due to the global virus pandemic.

Be patient, have cash saved up to wait for stocks to pull back and have cash saved up to buy consistently every month or quarter when stocks are on the way up too.

Those who get too excited, end up buying into a stock at too high of a price out of emotion. Emotions are not good in the investing world. Subdue them.

Those who day trade will know what I mean. If you stick to the original plan you have of what price you would like to buy the stock at and what price you want to sell at, then you will see better results. Check out this article on the stock market players and who you are up against each trading day.

Learn the millionaire mindset (make more money, save, invest, taxes)

Don’t Be Greedy in the Stock Market

Sell at or near your price target you set in your head to sell at. Don’t let your emotions convince you that the stock is going to go a lot higher than reality. When you become greedy and don’t take your profits you’ll see them get swept up in the pull back and kick yourself for not selling when the price was up.

Small profits add up over time. Don’t look for the home run. It’s rare and it’s luck. Go with what is predictable.

When I first started, it took awhile to learn how to block emotion and stay focused. I bought in too high when I knew better and then the pullbacks came and price starts falling creating fear of loss.

When fear emotions kick in you think your account is headed to $0 so you sell and now you’ve taken a loss and your mood has gone from excitement to nervous/depression. “What went wrong?” is the question running through your head as your stomach has a knot in it and you wish you would have never bought in the first place.

Resources:

Real Estate Investing School: How to make $100,000

What? Never bought in the first place? Emotions have corrupted thoughts.

What’s missing in the thought process is that yes you should have bought because you did your research, talked to an investment adviser, whatever and this is a solid stock selection. But you should have bought on the pullback which equates to the “buy low” portion of the old saying.

Have patience and wait for a good deal.

Then on a rise back to original price levels that you initially bought at out of emotion in the first scenario, you now would be selling high for a profit had you bought on the pullback instead.

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Hold, Don’t Sell When Stocks Drop

In regards to the emotion scenario, if you had held onto it since you bought it high and it dipped, then once it rebounds back up to original price levels you’re fine.

But instead emotions caused a buy high sell low. Not good. I’ve been there, done it, not fun. Remember to have patience. Stocks will sell off until they reach support levels which can be 10 day, 30 day, 50 day moving averages, for example.

Find technicals in the graphs such as support and resistance levels to support your buy low entry points and your sell high exit points.

Support is the price where the stock stops falling and heads back upwards over and over again over the course of a year. You’ll notice this trend on some stock charts and graphs when analyzing a stock over a 12 month timeframe.

Resistance is the price that the stock gets up to and can never seem to go higher and begins pulling back as sellers and profit takers emerge cashing out for gains.

Sometimes taking a loss on a stock is okay

Sometimes taking losses is necessary and may have been the best situation. It happens sometimes. But generally you can’t be shaken by day to day up and downs. Buy low on the dips, sell high on the run ups.

Do your due diligence. Research Stock Technicals to learn more on Google.

I’m just an average trader who follows this rule and has seen my discipline improve year to year. Through a 6 week stretch one spring I made about $1,500/week in net profits after commissions and losses. I’ve dialed back that aggressiveness now and settle for $150 to $300 profits each trade I sell.

You can track your trades on Profitly, a website where traders connect to their brokerage accounts to openly share performance and also to track stats such as average profits and percent returns.

Just make sure your wins are bigger than your losses. It’s the key to the game.

If you’ve been wanting to learn about stock investing then this post is for you. It’s a basic introduction to the stock market covering general information but future posts will go more in-depth on investing. Stock investing is a great way to let your money work for you and earn passive income.

We even have a stock investing course for beginners here.

Stock Investing 101

There are several markets out there that people could be referring to when talking about investing so for my posts on this site moving forward the term “stock market” refers to the equity market which is what most people would think of anyways when thinking of stocks.

This way there isn’t confusion as there are also markets out there where people trade bonds, currencies, commodities, silver, gold, etc.

The stock market is about supply and demand.

If there is a higher demand for a stock (buyers) than supply (sellers), the prices rises.

If there is a higher supply than demand, the prices falls.

Think of it like an auction. A seller is on stage trying to get rid of his red car. If the demand in the audience is high for a red car everyone will compete for it and the bids will increase until someone wins.

Same with stocks as people buying stocks pay higher prices if the supply is low and lower prices when the supply is high.

The stock market deals with public companies who may have been private companies at one point but decided to raise capital by selling ownership in their company to the public. The owners can then use this capital to fund growth and various business uses.

Once a company is public it may decide to sell more ownership in the future to raise even more capital. This will dilute the shares/ownership percent though for investors as they are flooding the market with more shares. Generally, stock buyback is a good sign because it is the opposite where a company purchases shares back from the public with their excess cash strengthening their ownership as well as other investors.

Stocks are pieces of paper entitling stockholders percentages of ownership in companies.

Some people who have millions/billions of dollars like Warren Buffet can purchase large percentages of the shares enabling them greater ownership and control of the companies board of directors. The board of directors oversees how well the company is run and managed by the management team.

For example:

Jimmy runs a huge private coffee company and decides he wants to raise capital to fund costs for opening more stores in local cities.

He decides to become a public company and sell 5 million shares at $50.00 each to the public raising $250 million dollars. So his company goes through an Initial Public Offering (IPO), shares are sold to the public, Jimmy’s company is now public, and he raises his desired capital to fund his business operations.

Those 5 million shares are now out in the world owned by different people and the current market value for them is $50 but that changes over time based on different things we’ll discuss later.

Stock Market Terminology

Keeping things simple today, here is terminology you should know that will help for understanding of future topics and posts about stock investing.

Stock– the capital raised by a business or corporation through the issuing of shares

Share– the piece of paper that signifies ownership of the company

Position– another term for owning stock. Ex: I have a position in Jim’s Coffee Company.

Stock Price/Market Price– the public price at which buyers and sellers trade shares

Buyer– Someone who wants to purchase shares of a stock, gaining ownership

Seller– Someone who wants to sell their shares of a stock, losing ownership

Stock Broker– Person/Company who executes trades for you. Example: E-trade (We all have seen those baby commercials), Scottrade, Edward Jones, etc.

Stock Account– Holds your different shares/positions in stocks, usually set up through a broker

Bid– Current highest price someones willing to pay for a stock

Ask– Current lowest price someones willing to sell the stock at

Spread– Difference between current bid and ask price of the stock

Volatility– How quickly stock prices move

Liquidity– Ease of getting in and out of a position, volume level of a stock

Market Order– An order placed at current market price

Limit Order– An order placed to trade stock at a certain specified price

Stop Loss Order– Order placed to liquidate/sell position when a specified price is reached or passed.

Trailing Stop Loss Order– A stop loss order that adjusts as stock price changes

Putting Stock Market Terms to Work

Let’s say you have $100 to invest in stocks.

You decide to purchase “stock” in Jimmy’s Coffee which is running $50/share meaning you can purchase 2 shares with your money. So you contact your broker (person who makes trades happen) and he puts in a market order for you which means an order to buy stock at the current market price ($50) which could change by the minute.

If the stock has high “volatility,” the price you pay for it may vary by several dollars and low volatility maybe a few cents. This can be important for people trying to buy low and sell high during high volatility so they may use a limit order which purchases the stock once the market price reaches their desired price they set.

Ex: Limit order set at $50.50 to buy stock but current market price is $50.65 so stock needs to come down for order to execute.

The market price may never reach it though causing your order to not execute leaving you with the options of changing your limit order higher or buying with a market order instead.

Once the order goes through you own 2 shares of Jimmy’s Coffee and your shares/position resides in your stock account.

The next day there is a strong demand for stock in Jimmy’s Coffee and not many people are selling so those who are selling can get a higher price because there are a lot of buyers competing for a select amount of shares available.

The market price rises as the people buying today are willing to pay $55 per share. Now if you decided to sell your 2 shares today you could get $55 each for a total of $110 minus the $100 you paid for them netting you a $10 profit.

A $10 profit on $100 paid is 10% which is a solid return on your money compared to savings accounts that pay less than 1% usually.

You could also lose money if a lot of people wanted to sell their shares of Jimmy’s Coffee one day in the market and there weren’t many buyers so the price falls as buyers want to pay the cheapest amount possible so whichever sellers are willing to sell the cheapest.

Historically, the markets have been known to rise an average of 6-8% a year which is why people diversify their savings into investment accounts as well as savings accounts to grow their money since a 7% annual return is better than the return you’d make in a bank account.

Again, this was a basic intro to the stock market and terminology. Read more articles in our stock investing blog section to further gain knowledge of investing in stocks.

You can also quickly get up to speed with our beginner’s course to stock marketing investing.