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The Psychology Challenge of Active Investment Part 1

November 3, 2010
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The reason that you need a Trading Methodology or strategy when investing in the market is to protect you from yourself. You need rules to determine when you should buy, hold, sell and how much capital to commit to a trade. If you don’t believe that human beings need rules to protect themselves then explain why rules exist everywhere: in schools, countries, companies, on the roads, in the workplace. Despite all these rules, people are still injured, expelled, sacked and killed. “Rules are there to be broken” I hear you say. Everyday people die because rules are broken. In the market it is not so bad, you merely lose all or a lot of your money.

Having rules allows the active investor to build confidence in a consistent method. With an inconsistent approach it is impossible to build any confidence because it is impossible to measure or repeat an inconsistent approach. Over time you will be able to measure your results which will build confidence and faith in the rules and processes which you can then repeat in the future. These very rules are what you will trust when the going gets tough.

It is important that you do not become overconfident in your own ability as this will lead to you breaking the rules. Successful active investors know that their confidence is primarily in the method that they use, rather than themselves, as they remain detached, merely focused on their processes, which are the execution of their edge in the market. The confidence they have in themselves is in their ability to execute.

Without confidence and faith in your method you will not “pull the trigger” to take positions in the market. To make profits in the market you must put your money at risk in the market. If you leave your investment capital in your trading account then you risk making cash interest rate returns on your money rather than medium-term active investment returns from the stock market. As the saying goes, 100% of trades that you do not make will not make you a profit.

Overcome the fear of experiencing losing trades otherwise you will not “pull the trigger” to enter trades or you will only commit small portions of your active investment capital.

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