How to Control Fear and Greed in Trading?: Fear and greed are two key factors in financial markets. Fear and greed play an important role in the psychology of trading. Learning when to hold and control these emotions is the only thing that is different between a successful trading career and a short-lived trading career.
First, you need to understand what exactly fear and greed are in terms of the stock market is? So first, let’s understand fear and greed in detail.
What is fear?
We know that fear is somewhat related to the fight-or-flight Sentiment that exists in every one of us. It is what we feel when we identify a threat. When positions move against trade, traders experience fear and this Creates a threat to the trading account.
Watching a position move against you generates the fear of realizing that loss and it directly impacts them so that traders hold on losing positions for much longer than they should. This was discovered as the most common mistake traders make. when DailyFX researched over 30 million live trades to pull out the characteristics of Successful Traders.
Another case where fear tends to get the better of traders is just before entering the market. Despite the analysis pointing towards a strong entry, traders may find themselves trapped by the fear of loss and end up running away from a well-thought-out trade.
Fear is frequently present when markets have crashed and traders are afraid to buy at the bottom. In this case, traders often decide not to enter a trade out of fear that the market will fall and miss out on the rise higher.
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What is greed?
Greed is very opposite to fear but can easily touch down traders in as much hardship if not managed properly. It tends to rise when a trader decides to take advantage of a winning trade by allocating more money to the same trade, and they will hope that the market will continue to move in the favor of their trade.
Greed can also be faced when traders experience a losing trade and decide to double the position, in the hope that giving more money to the problem will help the position turn positive. From a risk management perspective, this is very risky if the market continues to move against the trader and can quickly turn into a margin call and the trader will end up losing all.
Greed has emerged many times in the financial markets. One such time was during the dot-com bubble when people bought more and more internet stocks and raised their value tremendously before it all came crashing down.
The latest example is bitcoin; investors rush to the cryptocurrency thinking that it could only increase in value before it too came crashing down.
The Fact About Fear and Greed While Trading
Fear and greed can be unexceptional among traders and can be rather harmful if not managed adequately.
Fear is often observed as the hesitation to enter into a trade or the closing of a winning trade early.
Greed on the other hand exists when traders add more capital to winning trades or over-leverage to make a profit from small moves in the market.
There are several findings of the origins of these two factors, but when analyzed logically greed and fear both come from the innate human sentiment of survival.
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How to Control Greed and Fear to become a Successful Trader
There are several methods to take control of your emotions and make sure fear and greed do not impact your trading decisions or overall success.
1) Make a Trading Plan
Traders should have a trading plan in place to keep away any emotional instinct that diverges from the plan. Some examples of these are: overleveraged, avoiding stops on losing positions, double the positions on losing.
2) Smaller Trade Sizes
Placing a big-size trade on a demo account will not result in any loss, as there is no actual financial risk involved with it.
However, traders will most surely experience stress after watching prices move against a large live trade.
Such stress is likely to lead to bad decisions which may affect the trading account negatively, so it is important to keep these in check.
3) Have a Trading Journal
Traders also need to be responsible for themselves when trading. The best way to do this is to make a trading journal.
Trading journals help traders to record their trades and make note of what is working for them and sort out strategies that aren’t.
It’s important to eliminate all emotion when estimating the results of your trades and throwing unsuccessful strategies that don’t work for you.
4) Learn From Others
Research shows that emotion plays a very important role in trading, as it was found that on average, traders lost their money even though there were more green trades than losing trades.
This happens because the losing trades exceed winning trades i.e. traders keep a hold on the position to lose more when the price moves against their trade than they would receive if the price moved in the traders’ direction.
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Traders are right more than 50% of the time but lose more money because losing more in trades than they win on winning trades. Traders must use stop loss and limits to carry out a risk/reward ratio of 1:1 or higher.