- Fear and greed are two strong emotions in humans (and traders).
- They are strong engines of economic movements.
- Treat your trading like a business, trade a plan and don’t deviate due to emotions.
- There are several rules you can follow to reduce the risk you face greed and fear.
What is greed?
Greed is so much different from fear. Though both are equally capable of putting a trader into trouble if not well managed.
It usually occurs in situations where a trader decides to take advantage of a favorable trade by pumping more funds to the same trade, thinking that the market would be continually favourable.
Greed can equally occur when a trader is losing a trade and he then decides to double down. Hoping that things would turn around for good by using more funds to try to solve the problem. Looking at this form a risk management point of view, if the market keeps going against the trader, things would only get more risky.
Greed has surfaced numerous times in the trading market. A recent example is with the bitcoin. Many investors went into cryptocurrency with the thought that it would only rise in value but after a while, it did cash.
How to manage greed and fear to be a successful trader
There are many approaches you could take to control your emotions and to ensure that both fear and greed does not affect your decision making and success.
- Have a Trade Plan: traders are expected to have a trading plain in place which would keep them from straying away as a result of emotional impulse. Examples of these are: overleveraging, failing to apply a stop on a losing trade, doubling down on losing trades.
- Lower Trade Sizes: According to James Stanly a currency strategist, one of the easiest way to reduce emotional impulse on your trade is to decrease your trading size.
- Keep a Trading Journal: It is highly essential that traders are accountable to themselves while trading. An efficient way to achieve this is to create a trading journal. This journal help traders to keep track of what is working for them and what is not by the note they take. It is crucial to get rid of all emotions when reviewing the trading results. Stop the use of all failing techniques
- Learn From Others: try your best to make research and see what worked for others in the past and try to incorporate that into your own trading.
What is fear?
Fear is the feeling that arouse in us when we sense threats. Traders witness fear when the trading market fails to swing in their favour. Seeing a trade position swing against you instils fear of losing. This makes traders to hold on to losing positions more than necessary.
Another instance where traders experience fear is right before they enter a trading market. Even after a well thought out analysis shows a strong entry, traders may still be so fearful of losing that they may end up walking away.
Fear is also imminent right after a position crashes and the trader feels reluctant to make a further move towards buying, hence missing out when there is a high rise afterwards.
The truth about fear and greed while trading
Fear and Greed is popular among traders and can wreck so easily if not well managed. Fear usually leads to a trader’s reluctance to enter market or causes the trader to end a favouring trade prematurely. Greed on the other hand surface when a trader increases the trading capital due to current winning or over-leveraging in order to make profit from little moves in the market.
Managing fear and greed while trading
Fear and greed are the two elements that have a great impact on our daily lives. These elements have massive and dangerous effects on trading. Traders can eliminate these elements by viewing the big picture and making plans ahead.
As long as we are humans, dealing with greed and fear cannot be totally avoided in trading.
Research has proven that greed inflate market prices when there is a boom while fear depressed action through busts.
Greed and fear in your trade
Considering the fact that trading is somewhat a solitary job, traders often assume that they are the only people who go through greed and fear. This can’t be far from the truth. Huge amount of money passes through the market daily ranging from large commercial banks to mutual funds and all these are vulnerable to emotions. Greed and fear is a universal thing.
Controlling emotions during trading is not so easy. Large number of traders are familiar with most technical methodologies, even though dealing with greed and fear is a different thing entirely.
Can greed and fear be controlled?
- Risk what you feel confident over. If it is just a little percentage, then don’t go beyond it.
- It is best to limit your expectations to avoid disappointment. An individual trade, if properly sized has just minute effect on the overall outcome when thinking in probabilities.
- Trading should be handled as you would with business. Put in place a business plan with actual goals and pursue it.
- It is a good practice to learn to trade with money you can afford to loose. Going beyond your means is a sure way of triggering emotional reaction.
A lot of people are aware of the fact that fear and greed triggers movement in market prices but it is erroneous to assume that this emotional reactions are always negative.
A way of overcoming trading fear is by going into paper trading or simulated trading and when you feel confident enough, you can move into the real trading. Although it is a rarity for most traders to go into paper trading before digressing into the real trading world. This is because they are so eager to get into the market and start raking in money.
Challenges come with paper trading as well. The problem is that traders don’t get so exposed to emotions as they would with trading in the real world. And for this reason, it can only prepare you to a limited degree.
Using safe money management techniques is also another way of overcoming the fear of entering trades. The precise money management rule you will use is dependent on your trading technique.
Basically a good rule to follow is not to use more than a tenth of your initial trading capital per each trade. You can then proceed to increase the amount you are risking per trade as soon as you have realized twice the amount of your initial trading capital.
One can make enormous amount of money from trading but it takes time and persistence. And there would surely be occasional loss but one needs to accept the fact that they are not big deal in the trading world.
One of the keys to success in trading is to gradually increase the size of your trade. One last thing that can be used for eliminating trade fear is adopting a well proven trading system.
For a fact, it is not possible to completely eradicate greed and fear from trading. Though it is believed by many traders that it can be regulated and controlled.
In summary, you can realize great deal of money from taking positions but it’s a marathon not a sprint. It is wise to have a tangible expectation and not fall prey to greed. Some greed are not necessarily bad else you would not want to enter the market to begin with. It gets dangerous when you become overly greedy. Running into loss sometimes is not a big deal in as much you don’t let it escalate.