Eight rules to mentally prepare you for trading and investing

Reading time: 7-10 minutes (1.887 words)

Rule 1: do your own research

One of the first and most important rules in trading and investing: Always do your own research. There are a lot of websites, forums, social media accounts, etc. out there to manipulate your choices. Most beginners read about bitcoin or bitcoins reaching all time highs and want a piece of the pie. But should you even buy bitcoins when the price is at the highest point?

The worst thing you can do is to buy any financial asset just because you read something on a website or forum. You should know exactly what you are buying. Do you know what bitcoin really is and how it functions? Do you know how the blockchain works? Or how do you know now is the best time to buy stocks from company X? Because someone else told you or because you did the research? 

Action for you to take: 

Any time you want to invest money always answer the next questions for yourself:

  • Why do I want to buy this asset?
  • Does this asset have a future? Why?
  • Does this asset fit my goals/needs?
  • Can I explain to my neighbour why I’m buying stock or crypto X in detail?
  • Am I emotionally attached? (Do you need to make short term money? If the answer is yes, don’t invest).

Rule 2:  Your emotions are the biggest enemy

One of the hardest things about trading and investing is keeping your emotions out of the trade. How would you feel when you just invested $10,000 but the investment dropped to $5.000 in just a few days or weeks? Most beginners and even professional traders make the mistake to buy or sell based on emotions. This is something you need to learn. Some people are just too afraid of losing money and end up panic selling. In cryptocurrency trading, markets can go up and down within minutes. 

If you are afraid of losing money, then short term trading and investing might give you some heart attacks along the way. Trade on what you see, not what you think. And to trade on what you see you need a detailed trading or investing strategy. 

Action for you to take: 

Be aware of the fact that trading and investing will test your emotions. You should make a trading plan before you even begin trading. How much money are you willing to lose? Can you take this risk? Always stick to your own plan. 

Rule 3: never put all your money in one trade or investment

It can be tempting to put all your money in one profitable trade. But there is always some risk involved. These risks can be technical like an exchange or wallet that malfunctions. Or you are so excited that you mistyped the amount of coins you want to buy. 

Betting your entire life savings on some hype is a very bad idea. Let’s have a look at a recent example named Terra:

https://www.reddit.com/r/terraluna/comments/uqo6f8/im_going_through_some_of_the_darkest_most_severe/

https://www.reddit.com/r/terraluna/comments/uqqff0/my_friends_who_i_recommended_luna_too_all_hate_me/

https://www.reddit.com/r/terraluna/comments/un40h4/my_excolleague_attempted_suicide/

Terra Luna is (or was) a cryptocurrency trading around $86 of may 5 2022. On the 13th of may 2022, Luna is trading for $0.00003. Without going into details, Terra Luna experienced an attack which caused the coin to lose all value and literally became worthless.

Above are just a few examples from people who allegedly put all or a large part of their savings in Terra Luna. Don’t think this can’t happen to stocks as well. 

Action for you to take: 

  • Use proper risk management. Never risk more than 1% of your account balance when day trading
  • Never put your entire life savings in one investment (that also includes a house)
  • Never use money you need in the near future
  • Consider each dollar or euro gone for at least ten years. That is the mindset you need to have when trading or investing.

Rule 4: never follow the crowd

It would be better to exactly do the opposite of everybody else. When everyone is buying you should be selling. When everybody is selling you should buy. If some crypto coin or stock becomes very popular, everyone wants to buy it. That means the price will go up quickly. But unless there is a good reason for the price to go up, you should never buy when everybody else is buying. This rule corresponds with rule number one. Always do your own research. Is there a particular reason why the price goes up? If not, the price might go down even quicker. 

That's exactly what happened during the internet bubble in 2000. Stocks were overvalued. Everybody wanted to buy internet stocks to make money. The result was a big correction in the market. Basically any company with the word “internet” in their name would sell like newly baked cookies. While those companies had zero products or services. Those were the first who collapsed.

The simple fact is that up to 80-90% of all traders and investors end up losing money in the long term. If you already know that most people are losing money, you should do the exact opposite! People have a tendency to follow the herd. If everybody is buying stock X you should buy it right…? 

Action to take:

  • Always follow rule nr1: do you own research!

Rule 5: you will lose money

One way or another, you will lose money. It may be during a bad trade. Or during a recession. There is no single trader or investor in the world that only makes money. Warren Buffet, considered the most successful investor that ever lived, lost billions in bad investments. That does not matter because he still has a hundred billion in profit. The simple fact is that one day you will lose money.

Most beginners think they need to avoid risk. Risk can’t be avoided. Whatever you invest in, it always has a certain amount of risk. You can’t avoid risk, you need to manage it.

Others fall for the trap I discussed at rule nr2: they get emotionally attached. By far the worst thing any trader or investor can do is trying to win back their lost trade or investment:

  • They stop following their own rules
  • They take much greater risks in order to win back their money
  • They don’t realise if you lost 50% you need to win back 100% to break even.
  • They end up with even more losses and try to win those back as well. Resulting in pouring in more life savings or worse: lend money from other people.

Action to take:

You will lose money. Get this in your head. Be prepared. Especially if you are a beginner. You are learning. Consider this lost money as payment for your investing journey. Nobody does the course for free.

If you lose a trade:

  • Forget about it
  • Stick to your plan
  • Don’t be greedy by trying to win back the money you lost

Rule 6: don’t be greedy

Take a piece of the pie. Most traders aim for insane rewards, hold on to their trades for too long and end up with a loss. Trading or investing is not in any way a journey to become rich quickly. Don’t be greedy. 

If you are in a winning trade:

  • Stick to your plan
  • Don’t be greedy, take your profits
  • Take a piece of the pie, not the whole pie

The simple fact is, you can’t predict where the price will go. It might go up even more or plummet down. You simply don’t know. 

If you are investing for the long term the current price does not even matter. Stick with your plan, buy more shares if your analysis tells you so and hold for many years. 

Action to take:

  • Stick to your plan. This plan includes risk management which tells you when to take profit.
  • Don’t try to time or guess where the market will go. You will fail.
  • You don’t have to sell your position all at once. You can sell little bits of your position once the price moves up. This way you won’t miss the move upwards.

Rule 7: keeping track of your record

If you do not keep a track record of all your trades and money spent, you will most likely lose money. It’s like going to the casino every week and once a year you win a big prize. But you forgot how much money you actually had to spend to win this big prize. Your emotions take over because you won money. Earning $10.000 when trading must be a good feeling right? But if you lost $15.000 the month before then you still lost $5.000 instead of winning $10.000. Always keep track of your record. 

Also be aware that you have to pay transaction cost or trading fees each time you make a transaction. Or you need to pay a maintenance fee when buying an ETF. These costs will add up over time.

Action for you to take:

Use excel to keep track of every trade you make. Note the fees you need to pay. Note the transaction costs you need to make. Note every aspect of your trades. This is the only way to exactly know how much money you are making or losing.

Rule 8: Have your personal finances in check

Always have at least six months worth of monthly expenses in your savings account and never touch it. If your monthly expenses are $1000 then you should have at least $6000 in your savings account. You can’t take this money out. Only when there is an emergency. Your monthly expenses also include vacations and other one time spendings.

Only trade or invest when this goal is met. The reason is simple, if you are trading or investing with money you can’t afford to lose you will make mistakes. Also, not having enough money in your savings account might cause pulling out money from your investments in case of an emergency. This not only ruins the investment, you might end up with extreme losses because the market is not in your favour when you need the money.

 Action for you to take:

  • Always make sure you have enough money in your savings account before you start trading or investing. 
  • Never touch this money unless there is an emergency
  • Never pull money out of investments because you need the money. If you need that money you should not invest in the first place.

Where do you start?

Now you know eight important rules most beginners don’t know about. Trading and investing is not simply buying some coins or stocks and waiting for the money to pour in. 

I can help you find out what kind of trader you want to be. But not everybody will make money when trading or investing. In fact, most traders and investors lose money in the long run. If you decide to be a trader or investor in the stock market then you should take it seriously. Want to learn more:

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