How to Manage Fear and Greed in Trading?
Stock market trading often comes with two main drivers; greed and fear. Believe it or not, these two factors play a very important role in defining the psychology of investors. Being a trading expert, you need to understand the difference between these two emotions to make the right choice when investing.
If you can look at the bigger picture and plan your investments well in advance, you can essentially remove these trading drivers. In this blog, we will talk about these two factors, greed and fear in trading, along with managing them well.
Fear in Trading – What is It?
In trading, fear is generally the fight or flight nature common in almost every trader in the stock market. Whenever traders recognise a threat, they fear losing out on their traded money.
So, when you watch a trading position in the market going downward, it may invoke fear as you may realise your loss. Due to this, you may even hold on to a losing position for a long time. This mistake is the most common one that traders make.
Fear amongst the traders is a usual scenario when markets crash and traders get a little reluctant to buy a share. In such cases, they often decide not to enter the trade due to the inherent fear of losing as they feel that the market will go downward.
Greed in Trading – What is It?
Greed is different to trading fear. However, traders can still very easily land into this emotion if they cannot plan their investments better. Greed takes a plan when a trader decides on taking advantage of a trade when the market is bullish and puts more money on the same trade, again and again, hoping that the market will continue to move in his favour.
Greed can also come up when a trader experiences a losing trade and then thinks about ‘doubling down’, hoping to throw more money at the problem with a wish to turn it into a positive outcome. This is quite a risky thing to do as if the market keeps on moving against the trader; it can very easily turn into a margin call.
One of the most common examples of greed in trading is when several investors had started investing in bitcoin in the recent past. All of them believed that investing in cryptocurrency would double their money but soon after, we all saw how it came crashing down.
Tips to Manage Greed and Fear to Become a Smart Trader
As an investor, you can learn several ways to be in control of your emotions and make safer investments. Here are a few tips that can help you keep fear and greed at bay while making trading decisions for your overall success –
- Have a plan
Whether you are a beginner in trading or a pro, you must have a robust plan for trading in place. This will help you avoid any emotional impulses that may take you away from your plan.
- Lower your trading size
Lowering your trade size is the second-best way to keep your emotions off from your trading process. Moreover, this way, you will not be stressed while witnessing price swings on the trade graph. And when you have just a few or only one trade to follow, you will not stress over it much.
- Keep a journal for trading
You should be accountable for your trade, and hence, keeping a journal is advisable. So, you need to keep a trading journal where you can record your trades and make each note of what works for you while trading and rectify your strategies accordingly.
- Be open to learn from others
When you are open to learning, you will broaden your horizon. This will also be beneficial for you to keep your emotions out from trading. You will understand that losing is a part of the process, fearing it will not make any difference.
Keeping your emotions away when investing is challenging. But the top investors are aware of the tricks of doing it better. Keeping in mind the points mentioned earlier will help you master your emotions better. Happy investing!
Frequently Asked Questions
When people are overtaken by fear and greed in the stock market, overreactions can take place leading to a distortion in the prices. On the side of greed, the asset prices can rise beyond the fundamental value of the assets. On the other hand, when fear takes place, the sell-offs increase which can depress the prices way beyond what they should be.
Greed and fear are common emotions amongst the traders and could be rather damaging if not properly taken care of. To keep greed and fear away, you must have a plan for trading, keep a journal for trading, and be open to learning from others.
To take advantage of fear and greed in the market, a contrarian strategy can be a good idea. This means that you buy when others are selling off their stocks due to panic in the market and you sell your shares when others are buying shares due to greed. While this can be a good strategy, avoiding the way crowds are operating can be difficult and you might deviate from the plan because of that.