When investing in stocks, exchange traded funds (ETFs) or any other investment tool, allowing emotion to drive your decisions could make or break your portfolio.

Brian Bloch for Investopedia states that emotional contagion is what really causes investors to make huge blunders when it comes to making decisions.  They buy into the markets when prices are too high and they sell when everyone else panics and flees their positions.  Often people see what their peers are doing and then follow in their footsteps.

To make it even worse, downward pressure is stronger and more powerful than upward.  When things are going sour, the contagion of panic is much worse than the pressure to buy when markets are doing good and are overheated.

Understanding what is happening and why is just the first step. Now what?

Have a plan for entry and exit, and most importantly, stick to it. You should utilize your strategy and adhere to it no matter what.  Instead of following the lead of others who are reacting to the markets, instead react to firmly set buy and sell signals. We watch the trend lines and utilize the 200-day moving average to determine when we’re in and when we’re out. It’s a simple plan to implement, and anyone can do it!

For more stories on trend following, visit our trend following category.

Kevin Grewal contributed to this article.

Tags: Trend Following