I've always had trouble spelling "psychology".
But that doesn't matter as ADVFN has a very good editor who will make sure psy.. psc..will be spelt correctly! (You were correct Robbie - Ed)
Market psychology is an important topic.
Because however cool you think you are, your buy and sell decisions will end up being based on simple human nature.
And, being humans, we are very emotional animals. We let emotions rule various aspects of our lives and it's just the same with investment.
Emotions quite simply get in the way of making good investment decisions.
For example I lost £7,000 by buying shares in Coffee Republic for 27p in the year 2000.. and selling them for 4p in 2001!
That's because I made the classic novice investor mistake of hanging onto a loser.
On top of that I got far too emotionally involved with the company because I liked the coffee - I even started buying more coffee there than I needed, in the idiotic hope it might push up the share price.
Of course all it did was keep me awake at night!
We all want to feel good about ourselves, and selling for a quick profit makes us feel VERY good. Trouble is, our feel good emotions harm long-term investment gains because it stops us sticking with the winners.
Many investors even take profits if a share has only gone up two or three per cent.
That's because they can proudly boast to themselves and others; "I banked a profit."
And of course emotion is the main reason for hanging on to losers for far too long.
We hate feelings of regret and selling a losing share makes us regret and maybe feel a bit mad at ourselves.
So we'd rather watch the shares continue to decline than take the loss and feel bad about it. It's stupid really, because eventually when we sell even lower we feel even worse!
There's another psychological problem when it comes to selling at a loss. That's feelings of revenge!
We want to get that money back and that causes us to be emotional and start taking too many risks.
If we've lost half our money we might be tempted to go for a small stock we think might double in order to get the money back. Or other dodgy behaviour.
This is where an unemotional stop loss comes into its own - that way a stock is sold without bringing in the emotions of regret and getting even. And that way means you are less likely to make a too-risky next trade.
Humans are very much a 'pack' animal. We like to do things together and this very much applies in the shares marketplace.
That's why we sell when everyone else is selling and buy when everyone else is buying.
It's why we sell winning shares far too early and sell losers far too late.
One of the main reasons investors lose money in the markets is their inability to sell something at a loss - like me with Coffee Republic.
This is mainly simply due to ego.
We just don't like to admit to ourselves that we got something wrong.
So we sit there and hold on and on to a share that just keeps on falling.
And absolutely every investor has done this and you will do it too!
It is quite difficult to phone a dealer and admit you've made a loss and are now taking it. It's much easier to take a loss online!
Basically you have to go against human nature when you take a loss, but you must steel yourself to do it otherwise you will not become a successful trader.
Let's take an example.
You want to buy a new share but you have to sell a current one to raise the cash.
The choice is between two shares.
One share is showing a loss of 20% - and the other is showing a profit of 20%.
Which share should be sold?
I would bet nine times out of ten, the investor would sell the stock that has gone up 20%, rather than sell the loser.
That's because selling the winner shows what a good decision it was to buy it and validates that decision. There's also an element of pride involved and it feels good to lock in the profit.
You can also tell your best friend/partner: "I just made 20% profit". (You keep the loser to yourself!)
I feel pretty good when I lock in a profit and extremely irritated when I have to take a loss!
You really have to learn not to postpone the feelings of regret. Avoidance of regret is one of the main reasons investors lose money.
Perhaps this sums it up well: experienced traders have a saying "You have to love to take losses and hate to take gains".
Talking of gains I've had an excellent couple of weeks and I hope you have too.
My stocks are really rocketing - it's almost like the good old days of 1999!
My two favourite stocks have to be Dignity and Sondex, two crackers that just go up one or two pence a day.
I think one I bought the other day looks set to join them - Alumasc. I bought at 148p on the day of some cracking results. As I write the shares have already gone up to 165p. A director has just bought loads and things look very positive. I also expect to sleep at night, grab another 20% of the upside and a 6% dividend.
Well, that's the plan - unless psychology gets in the way and I end up taking profits too early so I can brag about it to the wife!