Investing Psychology – Fear and Greed in the Stock Market
(And Some Things You Might Not Have Thought About)
Everyone that trades absolutely must evaluate their trading psychology often. A lot of us have read about the effects of fear plus greed we encounter when we business the markets. And, more than likely, you have thought to yourself “I’m not fearful” and “I’m not greedy”. The fact from the matter is “YES, you are”. We each experience different levels of fear and greed in an industry. When we say ‘fear’, we are not really talking about you crouching in a fetal position in the corner trembling and swaying back and forth. And when we state ‘greed’ we are not talking about you wrenching your hands, salivating at the mouth like you would imagine Mr. Scrooge. Fear and greed are very refined in a trade and can alternate backwards and forwards from each other within seconds.
When the market immediately moves against our trade, you might notice an immediate rise in your anxiety. Seasoned traders are used to this because it is very rarely that a trader will hit the exact bottom or top of any kind of trade to make an entry. They will expect a move against them for a short amount of time. But , when is it time to exit the trade, if it continues its move against a person?
It isn’t that feeling you get whenever someone jumps out and startles you. It isn’t that feeling such as almost getting hit by a car. Nor is it the feeling that you have when watching a scary movie.
More often than not, fear in the market is a more subtle experience. You will have a tough time recognizing this as fear simply because your mind will be caught up in the moment. You will be very busy trying to make an important decision and discerning the future regretful distastefulness you might experience if the wrong decision is made.
After a decision is made and you are finished rejoicing your latest victory or even grieving the failure of your choice, step back and give yourself an honest, non-condescending, non-self-pitying analysis. You will find that fear acquired entered into the equation of the final decision.
Always be aware of this emotion. Never ever let it decide your fate. The only way to conquer it is to plan plus stick to that plan. Plan your entry, your exit, your target(s). Make sure to have alternative plans in the event of different scenarios that could possibly get play with your trade.
In reading through about fear and greed on the market, I have noticed that something was lacking in those writings. Patience is definitely never mentioned. Patience has the ability to enlarge fear and greed.
Since we have been talking about fear, let’s look at how patience impacts fear within the trade. Scenario:
Your trade is relocating against you. You are losing money. You are feeling that empty gut feeling and slight panic. If you give the situation too much patience, you could be in for much deeper losses. If you have too little patience, you could exit the trade prematurely and miss out on much welcomed gains.
What exactly do you do? At this point in the game, it is a toss up. Don’t beat your self up too badly if you associated with wrong decision but make sure you learn from this experience. The lesson to learn is to plan BEFORE you click that button that gets you to the trade in the first place. Many seasoned traders fall into the trap of declining to plan appropriately too. These people get cocky but the market will let them know soon enough of their failings.
Lessons Learned [hopefully before you place a trade]:
Fear is definitely present in a trade. Do not let this control you.
Patience amplifies the fearful feelings.
Plan your business.
Trading should be boring. If you want the excitement and thrill of the rollercoaster ride of ‘financial emotion’, proceed gambling instead. If you want to succeed as being a trader, plan your trade plus trade your plan – maintain it boring.
Only trade what you are able to afford to lose. Make absolutely certain that the money you use to trade is risky, disposable capital. If you find yourself in a ‘must win’ trade, your decision-making capabilities will be greatly hindered. This, together with patience, will amplify your feelings of fear and greed.
A person make a great entry. You have read through to let the good entries trip while you cut the bad records short. Greed is a part of the sport. You have to make sure that you grab all that you can because the next trade may cause you to lose more than you would anticipate to lose. You don’t want to leave any money on the table – folks, this is greed. Greed can turn into fear in a short time.
Greed, like fear, is also a very subtle emotion when it comes to trading the markets. It is probably more subtle compared to fear. No one likes to think of them selves as being greedy. And it is probably accurate that you are not greedy at all but greed can play a very effective role in your trades. It will not be such as the greed of Mr. Scrooge. Exhausted palms, a small spot of drool and a slightly stern countenance will probably not be on your trades’ agenda. Much more likely, without a plan, you will hang on to some trade too long or jump in at the wrong moment to satisfy your fantasy of making big money. Trading, by itself, makes certain that fear and greed exists. This is simply because you will want to cut your losses short while allowing your gains run as far as they can. This provides a very fertile ground intended for greed and fear to grow.
Once greed has taken over and you make your mistake, greed can turn to anxiety very quickly. In fact , a stock trader can experience fear and greed several times within one trading day. I use personally have had greed turn to fear then back to greed again inside seconds. Do not ride this hilly ride. Remember to do your best to eliminate the emotion by planning. The more psychological you become, the more likely you are to make an error.
Let’s take this off the beaten way to make a point. Surgeons are not allowed (in most circumstances) to perform surgery on the loved one. Family members and close friends should seek help from another surgeon. Why? The surgeon is psychologically involved, attached to the patient. That is a problem because emotion lends itself to making errors. The same is true for trading the financial markets.
Where does patience come into play with greed? Patience interacts with greed in much the same way it does with fear.
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It amplifies the feelings. If you have too much patience with a trade and become greedy, you can lose a substantial portion of your gains if not end up getting a loss on a trade that was performing fantastically. You must exit when your plan dictates that you exit. You could also enter into a trade prematurely. A trade you should have stayed out of in the first place.
The following should look very acquainted to you from the Fear article.
Always be aware of this emotion. Never let it decide your fate. The only way in order to conquer it is to plan and stick to that plan. Plan your entry, your exit, your target(s). Be sure to have alternative plans in case of different scenarios that could possibly come into play with your trade.
Patience has the ability to magnify fear and greed.
Lessons Learned [hopefully before you place a trade]:
Greed is always contained in a trade. Do not let it manage you.
Patience amplifies the carried away feelings.
Plan your trade. [Echo, Echo] Plan your trade.
Trading should be boring. If you want the excitement and thrill of the rollercoaster ride of ‘financial emotion’, move gambling instead. If you want to succeed being a trader, plan your trade and trade your plan – maintain it boring.
Only trade what you can pay for to lose. Make absolutely certain that the money you use to trade is speculative, disposable capital. If you find yourself in a ‘must win’ trade, your decision-making abilities will be greatly hindered. This, together with patience, will amplify your feelings of fear and greed.
Some thing you probably haven’t read about is the method patience affects fear and avarice. I think that this is a vital portion of fear and greed that no one ever talks about. Simply put, “Patience amplifies fear and greed”. The lack of endurance might cause you to enter or get out of a trade that you should have remained away from in the first place. The over-abundance associated with patience, might cause you to exit, enter or stay in a trade that you should have exited.
Everything in trading, as in life, is a bitter sword. Ever wonder why the Chinese came up with very popular symbols intended for ‘Balance’? It is because they recognized that everything has its good and bad qualities. Follow me here for a minute. Also ‘bad’ has a good quality! Why : Because if ‘bad’ did not exist, it would be impossible to have ‘good’! Sounds insane doesn’t it?
The same holds true to get Trading; Fear; Greed. Fear is definitely our natural reaction to things that we all feel we need to be protected from. I know I spoke of fear as a bad thing above yet I do not want you to completely ignore fear, just don’t let it control your trades.
Greed is our own way of trying to capture as much profit in a trade as possible for ‘fear’ that the next trade may not work in our favor. This again, can be a good thing as long as it is recognized and controlled rather than letting it control a person.
Hopefully this has shed some light on investing psychology and moves you to the next phase of becoming a seasoned trader. If you are already a seasoned trader, maybe you should have a step back and make certain that your investing psychology is exactly where it should be.