• June 13, 2018

Fear & Greed in Trading

In order to run a profitable account, it is necessary that you have a solid strategy, effective risk management and a balanced mindset. Trading psychology is often considered one on the hardest factors to control in trading.

Psychological changes are actually much harder to achieve compared to changes in an analysis or technique. But in order to start of the journey of ensuring a sound mindset, it is important to understand which emotions are likely to raise their head.

The two principal emotions that control the mindset in trading and their also can be responsible for driving the market are fear and greed.

Fear – this runs mainly around the fear of failure. A adults were strive for perfection and sometime this search for perfectionism can create a crippling fear. Fear or making a mistake, fear of getting something wrong, fear of losing money. Fear is the principal reason that new traders never make it beyond the demo account.

Greed – success in trading is measured in monetary term. In other words, this is how much money do you have in your county. Therefore, greed in trading is associated with the accumulation of funds in the trading account. Whilst there is nothing wrong with having the desire to win trades and earn money, if this desire is left uncontrolled it can result in suboptimal trading decisions or even detrimental trading decisions.

The sub optimal trading decisions which come from emotions taking over include entering a trade too soon or too late. Closing a trade too soon or too late or even taking a profit too soon or too late.

Lets just consider this last example. You’ve planned a trade and entered it. In the plan you were willing to accept 50-point loss (for sake of the example). The trade moves 10 or 15 points in your favour. Suddenly you have this fear that the market will snatch those 10 or 15 points away from you. In reality, in the planning stake you were willing to risk 50 points. Suddenly in reality you are wanting to take just 10 or 15 points profits. This account will typically see many winning traders with small wins and then a few large losing trades which wipe all the losses.

There are a couple of general pointers which you can and should include in your trading in order for your emotions to controlled as much as possible.

  1. Trading plan – always have a trading plan and always stick to your trading plan. This I s essential if you are to try to keep emotional trading to a minimum.
  2. Have a checklist – this refers to a physical checklist that you must tick through prior to making a trade. This will make trading more mechanical which ultimately leaves less room for emotions.
  3. Risk management – this may seem like the boring part in trading, but it will prevent you from blowing up your account. If you plan your trade and are aware of your potential loss, this should make you less anxious over that loss resulting in a more relaxed mindset.

A pretty interesting post, huh?

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