Investing in Stocks, Not Ideas
Trading the markets is a challenging enterprise. It takes time and effort to find a trading idea that will make you a profit. Traders differ in terms of how they find such ideas. Some may backtest until they find a strategy that will make them a profit in future markets. Other traders may read stacks of financial reports in an attempt to find under-valued companies that may shoot up in the coming weeks or months. To the extent that you put your effort and energy into finding a trading idea, you are psychologically invested. And even though it's just an idea in the end, if you aren't careful, a big psychological investment in an idea can be your undoing.
Winning traders show a healthy detachment to their ideas. A trading idea is nothing more than a working hypothesis. It may be right or it may be wrong. Sometimes even a great idea can produce loser after loser, if market conditions are not optimal. A winning trader remembers that the bottom line is making a profit, and nothing else matters. But when you've spent hours in search of a winning idea, it may be hard to just throw out the idea when it isn't working the way you had planned.
Why are we over-invested in our trading ideas? Part of it may be ego. If you view yourself as a brilliant trader who has a special talent for analyzing the markets, you may start to get too wrapped up in proving your superiority. Many people equate the ability to discern astute trading ideas with innate intelligence. When you work under this assumption, though, you'll associate a losing trading idea with a lack of intelligence. It's better to take things a little more lightly. It's better to be a more flexible trader than an "intelligent" trader trying to inflexibly maintain a self-image as a trading genius.
When you execute a trade based on your own cherished ideas, it's vital to continually entertain the possibility that you may be wrong. You might even want to monitor your self-talk. It is useful to practice changing your internal dialog from, "I need to be right. If I'm wrong, it shows that I'm too dumb to develop worthy trading ideas" to something like, "I don't need to be right. Being wrong has nothing to do with my abilities. It's better to admit I'm wrong and avoid a big loss than stubbornly stick with a bad idea and feel sorry for it later."
It's easy to get stuck on being right. Sometimes you stick with a trading idea because you are trying to convince yourself that you have special talents, and that your longevity as a profitable trader is assured. Other times, you may find yourself convincing your trading partner or your boss that your trading ideas are worthy. It's easy to invest too much of your self-esteem into a trading idea. At that point, not only is money on the line, but the value you place on your talents. And when that happens, you may lose your ability to objectively evaluate your ideas. It's vital to stay flexible. Remember, you aren't investing in ideas. You are trying to make a profit by investing in stocks.