Fear and Greed in Trading

There’s an old market saying that the stock market is driven by just two emotions: Fear and greed.

This adage is still in effect. If you have been trading for a while no doubt you will have experienced both emotions on more than one occasion.

Essentially, greed means wanting more. This is something we witnessed during the tech boom where people wanted, and expected, more and more. Of course, after reaching a critical point, we saw how quickly human emotions changed into fear. Fear of losing what they owned; which then escalated into panic.

Fear on the other hand is about the unknown. Not knowing an outcome is something that most people find difficult to deal with. When a stock falls below your purchase price, the most common question is “When will it stop falling?” This not knowing - but wanting to know - is what causes the classic ‘rabbit in the headlight syndrome,’ where you just freeze up.

As a trader, you need both of the emotions of fear and greed. You need to learn to balance them in such a way that they become a useful mindset to you. When you are too greedy you can become reckless and as a result find yourself overtrading. If you have no fear then you may find yourself holding on to that loser too long.

In the movie “Wall Street” Gordon Gecko states that “greed is good” - and in a bizarre way it’s true. Without greed you would never take action. You need a little greed to get you into a trade. But at the same time you need a little fear to ensure you protect yourself from facing a huge loss.

When I trade, my plan and strategy is in place. I have to be patient and disciplined to wait for a specific signal to enter a trade. Once this occurs I know how much risk I am prepared to take, even before putting my trade on. This is how I deal with the unknown part. In other words, I know that I will lose x amount if my trade goes against me. By knowing this outcome my fear is removed. If the fear is still there then I reduce my trade size or take off the trade completely.

At the same time, I have a specific target where I would like to exit my trade. By using Limit Orders I can exit the trade without getting caught up in a frenzy. Yes, this means that sometimes the stock or index races past your exit point. However, if you can accept that you will never catch the exact top, then you will be on your way to stress-free trading.

This is the mindset that works for me. As a trader you need to find a style that works for you. This is something that takes time and experience. If you have a loss, ask yourself why it happened and how you dealt with it. There is more to learn from your losses than from your wins.

Happy trading,

Sandy Jadeja | Chief Market Strategist

sjadeja@odlmarkets.co.uk