Fear and greed are often recognized as two key drivers of financial markets. While this is undoubtedly an oversimplification, fear and greed play a vital role in the psychology of trading. Learning when to embrace and control these emotions is the only thing that draws a line between a successful trading career and a short-lived trading career.
The most difficult aspect of trading is “handling your own emotions”as a Human Being we are emotional and if emotions are removed out of us there will not be difference between Robot and Humans. As a trader its always good to be MINDFUL about our emotions and this is what a great trader have done, They have not removed emotions but they have becomes MINDFUL about their emotions and handled them.
A loss is a tough thing to get over, and the bigger the loss, the tougher it gets.Almost all professional traders have a short-term memory, for them each trade is a random walk,hence they will mostly not have a overhang of a loss making trade they just did. In other words, the best traders only see the trade they’re about to enter, or the one they’re currently in. The rest are out of sight and out of mind.
This mindset is the major difference between successful and unsuccessful traders?
Successful traders are wise enough to know that fear and greed will ultimately lead them down the wrong path.
How Fear and Greed affects trading
Fear is a learned response to a particular event. In the case of trading, when you have a trade that goes bad, the regret and frustration can carry over into the NEXT trade. Or worse, the fear is so consuming, that you don’t enter your next trade.
Greed creates the opposite problem. With a couple of consecutive winning trades, the ego can enlarge and feeling invincible overcomes being logical. This will ultimately lead you to trades that you normally would not have entered. Finding good trades is hard enough, while finding poor trades seems to get much easier after a couple of winners. Never mistake genius for a little luck.
It’s important to recognize your emotions, how they affect your trading. Amateur Traders would like to have profit in each and every trade he/she is taking but not every trade taken will be profitable. The trick is to keep your looses as small as possible, Always remmber small is beautiful.
How to Manage Fear and Greed to Be a Successful Trader
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Have a Definite Plan
Having a definite plan while trading in stocks ensures that you stay on track and avoid any emotional impulse that may deviate from the plan. In particular, the right plan can stop you from emotion-induced:
- Overleveraging
- Doubling down losing position
- Removing stops on losing position
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Put Aside Your Get Rich Quick Mentality
One myth flowing around the stock market for ages is that you can get rich overnight. However, the fact is that the stock market is a great place to grow your wealth but, in the long run, only. The market does offer better returns than any other investment option, but that takes time. So, if you wish to see your money grow multifold, abide by patience and let your investment grow. Follow your plan, and don’t give in to any impulse of fear or greed.
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Keep a Trading Journal
As a stock market investor, you need to be accountable to yourself while investing. You should keep constant track of your investment. With that track, you should be able to assess all your investments and see whether they align with your planned goals or not. Having a trading journal of your investment can help you make analytical decisions while putting your emotions down. Further, it also gives you the ability to rebalance your investment portfolio as and when required.
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Don’t Give Up Learning
Nobody is at the pinnacle of knowledge when it comes to the stock market, not even Warren Buffet. As an investor, you should always be open to learning, learn about the market’s fundamentals, read about how the market functions, and understand all technical aspects. Most importantly, analysing what others are doing; their deeds could be a great source of knowledge. When you learn, you always go for analytical decisions and not for emotional impulses.