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Great news: A company you have been thinking about purchasing stock in just unveiled groundbreaking technology that’s captivating everyone, and its share price is surging. You don’t want greed or fear to lead you towards emotional trading, so how do you navigate this situation?

When a stock suddenly becomes “hot”, meaning it is in high demand because of its performance or because it is in a sector whose popularity has soared, it can be easy to fall into the habit of being irrational —letting a desire to build wealth or anxiety about losing your money drive your trading behavior. But successful investors keep their feelings (whether excitement, optimism, or cautiousness) and impulsive decisions at bay, whether it’s a bull or bear market.

That’s why you need to develop a disciplined trading psychology. That is, a levelheaded mindset when it comes to investing in the stock market. Having one can make it more likely you’ll find trading success.

So how do you keep your cool when the market heats up?

Have a plan and stick to it.

Whether you’re a day trader (buying and selling in the same day; oftentimes, these are professional traders) or someone who invests in the financial markets for the long-term, one way to keep a level-headed mindset is to implement a trading strategy that takes your risk tolerance and financial goals into consideration.

For example, let’s say you are hoping to make a short-term investment in Company A, and you buy shares for $100. If your risk tolerance is low and you’re happy with making profitable trades (even if they’re small), you might sell as soon as you turn a profit. But if you have a greater tolerance of risk and hope to make more money, you’ll likely hang onto your investment and see how high it rises.

The same goes if the market trends the other way. If you have little tolerance for risk and utilize a conservative investment strategy, it might lead you to sell immediately if the price starts to drop. But if you can stomach some volatility, you might keep your investment through a downturn with the hopes an upswing (and profit) will be on the other side.

You can learn more about your investing style (and have some fun!) by taking our Invest Animal Spirit Quiz.

When it comes to making the right moves for your portfolio, the media and/or other investors might encourage you to make one move or another. But when you have a plan that aligns with your risk tolerance and your financial goals, your trading psychology won’t fall victim to rash investment decisions or sudden market movements. You’ll buy (or sell) when you feel most comfortable — not when a stock’s price suddenly spikes or drops.

Do your homework.

Research into historical market trends can help you keep your cool, regardless of daily market fluctuations.

To help identify potential trends and opportunities based on past data about a stock, successful traders often look at what’s referred to as a technical analysis. A technical analysis can get, well, technical, but here are the basics:

  • A technical analysis gauges a stock’s future price by analyzing past activity.
  • It looks at specific chart patterns and examining historical data related to the stock, including trends and counter-trends, support and resistance, swing highs and lows, volume, price charts, and moving averages.
  • It differs from a fundamental analysis, which reviews a company’s balance sheets, income statements, cash flow, quarterly earnings, price-to-earnings ratio, among other quantitative measures of a business’s financial health. A fundamental analysis also analyzes other aspects of a company, including its competitiveness within its industry and the quality of its management team.

Technical analysis shouldn’t be the only type of research you do into potential investments. Fundamental analysis should also be taken into consideration. That’s because both ground your trading psychology in data, not emotions. (After all, you may tell yourself you’re losing money by hanging onto a particular stock, but the data could tell you otherwise.)

Whether you’ve adopted the mindset of a bullish trader (an investor who thinks the market, a specific security or an industry is poised to rise) or tend to stick with a more conservative approach, our Self-Directed Trading provides you in-depth research and market analysis tools to help inform your trading plan, whether you’re buying and selling commission-free ETFs, individual stocks or bonds, investing in the forex market, or conducting options trading.

Know the importance of diversification.

Are you a trader whose money fears keep you up at night? Do you worry about losing everything you’ve invested in the market? Is trading day your most stressful event of the year?

If you answered yes to any of these questions, you’re not alone. But fortunately, there’s a simple solution.

A diversified portfolio manages risk by spreading holdings across different asset classes, whether it’s stocks, bonds, mutual funds, ETFs, foreign currency, cash, etc. As the markets fluctuate, the holdings in your diversified portfolio will move up and down — any investments performing poorly will be balanced by ones experiencing growth.

In other words, the losses won’t hurt as much because they’re balanced out by wins in other parts of your portfolio.

Stay away from the news headlines.

It’s tempting to freak out and lose track of your trading psychology when you see good or bad news about one of your investments cross the ticker.

Small market happenings can be sensationalized on any given news day. For example, a company’s tiny victory might dominate the headlines if it’s a slow news day, whereas a business’s big breakthrough could get buried if there’s a national disaster. So you shouldn’t put too much stock (pun intended) in media headlines.

Successful, emotion-free traders stay informed without letting the latest happenings rule their investment strategy. You can do the same, whether it’s checking market news only once a day or promising to yourself that you’ll never buy a “hot stock.” Then commit to only make moves that align with your trading plan, not the day’s headlines.

If struggle prevails, think about your approach.

Do you find yourself continually struggling to take the emotions out of trading? Don’t be hard yourself. Your trading psychology is clearly telling you something.

Give yourself a break and consider using a robo-advisor to build your portfolio.

A robo-advisor combines human expertise with computer software and unique algorithms to build your portfolio. This more hands-off approach to investing is also even-tempered: It won’t allow risk aversion or emotions to select your portfolio holdings. Instead, it takes your investing goals, the level of risk you’re comfortable with, and your timeline for investing to build your portfolio.

Our cash-enhanced Managed Portfolio offers features like a cash buffer (which reduces risk), automatic re-balancing, and tax optimization.

The financial market comes with highs and lows, which can make it hard to keep your cool. But market disruptions don’t have to dictate your trading psychology. Aim to be a trader that takes a strategic measured approach to your money. Doing so can help grow your wealth — and bring you peace of mind.

Get started investing with us today.