Introduction
The first step to profitability begins with the need to develop the mindset of a successful trader or investor. The importance of this skill can not be stressed enough.
It is the difference between success and failure in not only trading and investing, but in literally every single endeavour you undertake.
Elite sportsmen and women, world renowned business leaders and highly successful traders and investors all share a similar mindset in the way they approach tasks and the setbacks they encounter.
To become a highly profitable trader or investor you must nurture a mindset for success. Part of the process of developing a winning trader or investor mindset is to develop an understanding of the normal decision making biases we as humans are all prone too.
To better understand these preconceptions and how they can affect your decision making, I have included a series of questions which are designed to highlight some of the more common biases that may be influencing you decision making.
Once you are aware of these biases, you will be better placed to develop strategies that will assist you in over coming them.
The Preconception’s that Affect Our Thinking
There are six questions which should take you no more than 10 mins to answer. So, find a pen, paper and a quite spot to yourself.
Question 1
You buy stock in ABC Company. You pay $10.00 per share. The price of ABC steadily rises to $20.00.
i. How much profit have you made?
A short time later the stock falls to $18.00 per share? You then decide to sell all of the stock.
ii. How much money have you made or lost?
Question 2
Your trading account has a $500,000 balance. You like a company called XYZ Inc which you are hoping to purchase and make a quick $3.00 profit on each share. You buy XYZ Inc near the close of trade for the day. You pay $50.00 per share. The next day the stock opens at $49.75.
i. How do you feel? [select one]
a) You have doubts about your decision.
b) You read a number of broker reports on XYZ Inc. They have a price target of $55.00 per share. You believe the analysts are right and the market is wrong.
c) You feel comfortable because the stock has not hit your stop loss of $49.25.
Six months have since passed and stock XYZ Inc is now trading at $22.00.
ii. How do you feel? [select one]
a) You now avoid all stock reports on TV or in the financial newspapers.
b) You believe the company is a good company that has been wrongly discounted by the market and decide to hang on to the stock for the long term.
c) You feel comfortable in knowing that you exited at your stop loss of $49.25. This gave you a loss of $7,500 on the trade.
Question 3
You have developed a system that has a 60% win to loss ratio. Your last six trades have all been winners. What do you expect your next trade to be? [select one]
a) A winning trade
b) A losing trade
c) Either a winning trade or a losing trade
Question 4
You are holidaying in picturesque Macau. While walking through the streets you come across a $10 casino chip. You head to the casino and decide to play the roulette table. You bet the $10 chip on your favourite number. It wins and pays out $350.
You continue to play the roulette table, each time betting all your winnings. Time and again you win. Soon you have over $15 million in winnings. You try your luck again. You place all your winnings on the table, over $15 million. This time you lose.
You get up from the table; walk outside to be greeted by your friends. They ask “How did you go”. You reply: [select one]
a) I broke even
b) I lost $10
c) I lost over $15 million
Question 5
The car you have driven for years has just broken down. You need to purchase a replacement vehicle. This will require you to access some of your savings and investments. You decide to sell some of your stocks to pay for the new $30,000 car.
Which would you sell? [select one]
a) $30,000 worth of shares in XYZ, which you purchased for $10,000, or
b) $30,000 worth of ABC, which you purchased for $45,000
Question 6
a) You invested in a company AZ1 Inc. The company has budgeted $1 billion to develop a ‘cutting-edge’ technical innovation that will make cheap, sustainable ‘green energy’ available to everyone. The technology is 80% complete when a competitor launches a similar, but more superior product.
As a shareholder, would you support the company spending the final 20% to finish the ‘green energy’ product? [Yes or No]
b) You invested in a company AZ1 Inc. The company has budgeted $1 billion to develop a ‘cutting-edge’ technical innovation that will make cheap, sustainable ‘green energy’ available to everyone. The technology is 80% completed when a competitor launches a similar, but more superior product.
As a shareholder, would you support the company spending the final $200 million to finish the ‘green energy’ product? [Yes or No]
Conclusion
The first step towards long term profitability is to recognise that your decisions are often affected by preconceptions. These preconceptions can develop subtly over time. Often most people are not even aware of them.
In trying to create long term wealth these biases can be deadly. They will sabotage your trading and wht’s more you won’t even know why your trading and investing is so disastrous.
But, by becoming aware of the beliefs and preconceptions that may be affecting your decision making, you can begin to design and implement strategies that will assist you in combating these ‘silent money killers’.
If your interested in knowing the answers to these questions…. Sign up for the EBook.
Struggling to achieve profitability in your trading or investing?
Then Sign up to receive ‘The No Bulls@#t Guide to Achieving Profitability’ EBook
Find out what ‘secrets‘ separate the master trader or investor from you.
