Most of us would be able to relate to the nervousness and anxiety that one goes through after the buy order for a stock has been executed. We are all waiting to see the outcome. We are waiting to see a profit. We are waiting to be right. This nervous energy and edginess leads to us to make irrational post purchase behavior irrespective of the fact that our buy trade is profitable or unprofitable. Many a times we end up punishing our good trades and keep on tolerating our bad trades.
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| Typical emotional response to profitable and unprofitable trades |
A key to making money of our profitable trades is to have the emotional intelligence to keep nurturing the profits as long as possible. We need to give our profitable trades the chance of riding out the complete upside.
Stay with the trend until it bends
While one can still hang on to a profitable trade, cutting losses is more difficult when the trade goes wrong. Emotionally it is difficult to accept a loss and we end up hoping against hope to somehow recover our money. If money has been lost on a trade, it is best to prevent further loss of money on a wrong trade. In such times it is best to remember the two rules of Warren Buffett
Rule #1 of investing is “Don’t Lose Money.”
Rule #2 is “Don’t forget rule #1.”
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