One will experience lot of emotions while trading, specially who are new to trading. Greed and fear are two main psychological aspects in trading. If they are controlled one can excel in trading and be profitable, otherwise you’ll only see the losses bulging.
Greed and fear relate to an old Wall Street saying: “financial markets are driven by two powerful emotions – greed and fear.” Let’s take a look at how these factors affect trading.
Here are some of the points where fear, greed and hope come into trading:
- Most people come into stock markets and trading to get quick profits or to become a millionaire/billionaire overnight, which is not that easy even if you learn how it all works.
- People often buy bad and penny stocks in huge quantities assuming it to become a multi-bagger overnight but they generally end up in losses.
- Holding on to loss making trades in anticipation that they may recover the lost money.
- Booking profits early fearing that the profits may evaporate.
- Not booking profits in time anticipating or being greedy to get more money.
- Compulsive/over trading i.e. trading even if your trading setup doesn’t give a buy or sell indication or a specific reason to take the trade. This will induce mistakes and panic comes into picture.
The above points also become a part of bad trading practices list. 🙂
How to overcome greed and fear?
- Learn about stock markets before entering into it.
- Don’t think of becoming a millionaire/billionaire overnight. It only happens in a lottery if you’re lucky!
- Put a stop loss for all trades.
- Use stop loss effectively i.e. keep trailing your stop loss once your position is in profit. This will not only help you be calm but also helps you to keep your emotions at check. You won’t start thinking of loosing your profit or you won’t fear loosing all of your invested capital.
- Close the loosing trades early and maximize the winning trades by using stop loss effectively.
- Take a trade only if your setup permits. This will help you overcome the compulsive trading behavior.
- Do not over-trade or take a trade in revenge to get back the lost capital. This may only aggravate the losses as emotions will be flowing.
- Think of stock markets in terms of probability, and take high probability trades.
- Make a trading checklist and follow it strictly. This will help in keeping your emotions off the trade.
- Do not chase a lost opportunity.
The above points also become a part of good trading practices list. 🙂