Mastering Fear and Greed in Financial Trading

Aspect of Fear

Fear is a complex emotion taking many forms such as worry, fright, alarm, and panic. When fear is given free sein, it typically combines with other negative emotions such as hatred, hostility, anger, and revenge, thereby attaining even greater destructive power.

Fear among investors shows itself in two forms: Fear of Losing and Fear of Missing Out

• Fear of Losing Money: This form of fear affects rich and poor alike. The more you have the more you can lose, and therefore the greater the potential for fear in any given individual.
• Fear of Missing out: This phenomenon often occurs after a sharp price rise. If investor are underinvested as a sharp rally begins, the perception of missing out on a price move and of subsequent underperformance is so great that the fear of missing the boat forces them to get in.

Fear in effect, causes us to act in a vacuum. It is such an overpowering emotion that we forget about the alternative, temporarily losing the perception that we do have other choices. 

Be Objective in Financial Trading

Prices in financial markets are determined by the attitude of investors to the emerging economic and financial environment rather than by the environment itself. This means that price fluctuations will be determined by the hopes, fears, and expectations of the crowd as they attempt to downplay future events and their biases toward them. Your job is to try as much as possible to ignore those around you and form an independent opinion while making a genuine attempt to overcome your own prejudices.

The markets themselves are driven by crowd emotions. Nothing you can do will change that; it is a fact that you have to accept. Despite this, becoming a successful investor demands that you overcome your mental deficiencies and rise above the crowd. As a natural result, you will find yourself outside the consensus.

There is no Holy Grail in the Financial Markets

There is no Holy Grail principally because market prices are determined by the attitude of investors and speculators to the changing economic and financial background. These attitudes tend to be consistent but occassionally are irrational, thereby defying even the most logical of analyses from time to time. Stock do not sell for what they are worth but for what people think they are worth. How easy can we explain that any market, stock, commodity, or currency can fluctuate a great deal in term of its underlying value from one day to the next? Market prices are essentially a reflection of the hopes, fears, and expectations of the various participants. History tell us that human nature is more or less constant, but it also tell us that each situation is unique.

Trading Psychology Explained

All of us are comfortable buying stocks when prices are high and rising and selling when they are declining, but we need to develop an attitude that encourages us to do the opposite. Because of the task of beating the market is not difficult, it is the job of beating ourselves that proves to be overwhelming. In this sense, " beating ourself" means mastering our emotions and attempting to think independently, as well as not being swayed by those around us.

Success based on an emotional response to market conditions is the result of chance, and chance does not help us attain consistent results. Objective is not easy to achieve because all humans are subject to the vagaries of fear, greed, pride of opinion, and all the other excitable states that prevent rational judgement.

There Are Only Three Types of Trading Days

Trading is really pretty simple. You try to complicate things, but the fact is, not matter what product you're trading, the market can only move in one of three directions: up, down, or sideways. So there are really only three types of trading days: Days to make money, days to lose less money and days to do nothing.

You know from the minute you wake up in the morning-just from the vibe of the market, world events, the way reactions to those events are playing out and your own intuitive feelings-what kind of a day it's going to be for your portfolio. You know whether it's a day you should be making money, a day you should be losing money or a day when the best thing you can do is to do nothing.