Trading Psychology: Fear and Greed
You can be Chief know-it-all when it comes to understanding the markets, but if you don’t have the right trading psychology you won’t be getting all that far, especially if you plan on having consistent success in the long term.
The importance of having the right psychological approach to trading can’t be understated, and for a lot of us out there who are a little on the competitive side, that means having to go against our natures. Trading psychology is all about making decisions based on tried and tested facts, rather than being driven by emotion.
And the two biggest culprits are the age-old classics…Fear and his cocky sibling, Greed.
Help with Anxiety, Stress and Fear for Traders
Fear
You lose a couple of trades, the doubts start to creep in, you’ve just lost some of your hard earned pennies…so you become a little more risk averse and hesitant towards opening new positions because you fear losing more money. It’s all a snowball effect, and a likely outcome unless you’re able to detach yourself and make decisions based solely on all the hard work you’ve put into your system. That’s why you did it in the first place right? Trust that your research and tried-and-tested system will show you when to be in trades and when not to be, and not that gut feeling of yours.
The most common examples of when fear plays a deciding role in trading psychology are:
1) Snatching at profits when a position starts to go your way. The time old adage of ‘Cut losses fast, and let your winners run’ is one you should definitely follow
2) As mentioned earlier, getting ‘The Fear’ and not entering positions because you’re too worried about them going against you
And then we have the other side of the scale…
Greed
Ok, so you just closed a successful trade and got a substantial amount of profit back. But what if you had invested a larger stake per point…or what if you held out a little longer even though your system was signaling to get out…you could have made even more money! Sound familiar?
This is where greed rears its ugly little head, but the results can just as easily be a swift bitch slap back to reality. The reason you have (or should have) a system is to indicate when you should be in or out of a position, and the same goes for your money management strategy so you’re not investing too large a percentage of your overall trading funds on one position. Check our story of how fear can grip you in the strategies section.
However, don’t get greed confused with motivation. Success that breeds motivation is completely different to success that breeds greed. One helps spur you on with the knowledge that what you’re doing is correct, the other turns you into a money hungry fool.
It’s basically common sense
In short, trading psychology is all about having rules and sticking to them. Don’t get into the habit of making decisions based on your emotions. Like in my very first post where I mentioned a friend adopting a ‘Terminator-esque’ trading alter ego to keep him unemotional, this is how you need to be if you want to ensure consistent success. Ok maybe not as extreme as imagining yourself as a machine but you get the picture.
And then there’s understanding the impact fear and greed has on the markets in a broader sense which is a whole other thing, and almost just as important to understand. But that’ll be one for another post though.
Join the discussion