Philosophy Risk Management Trading Lessons

How Does Greed and Fear Influence Your Trading

Written by Noah Hochman

Whether you are a day trader, long term investor or pretty much anything in between there are two factors that have significant influence over many who dabble in the financial markets. These two key factors can exert some extreme stress and anxiety for those who have not yet learned to control their influence. These driving forces in the financial markets are known as greed and fear.

Wall Street is driven by Greed and fear, it doesn’t matter whether you are the manager of a huge fund or the guy who buys a few shares of a stock online, the point is that emotions have a great deal to do with how you make decisions in the financial markets.

Almost everyone who trades stocks or other financial instruments understands the concepts of greed and fear at some level but they seldom will admit it has any affect on their decision making process. If you are to become successful as an investor or trader of any kind then you must realize how emotions affect you and learn how deal with it. Not everything will go your way every time and often you will see a winning position turn red in the blink of an eye. The decisions you make in spite of these intense emotions are among the key factors that separate consistently profitable traders from those who don’t last long in this business.

Understanding the psychological elements of greed and fear is generally easy, but identifying them and how they may be playing a significant role in your decision making process, well…not so much.

One common example of how this can wreak havoc with your decisions is when you purchase a stock and are elated that you got it at a great price as the stock begins to rise.  You think that the upside is amazing and begin purchasing more shares.  The stock has now moved pass the point that you had originally hoped it would hit but you decide to hold on to it rather than take some profit. This is greed at work, you want to squeeze everything you can out of this move, but others who may have joined the upward move are easing out of their positions and the direction of this move has flattened out and begun to change direction.

You hold and hold as you think that this stock is going to turn around any minute and you can still salvage some profit but it has now reached the price at which you originally purchased the stock. Your nice profit has now turned into a small loss.

Fear, and trading stocks do not work well together, especially since stocks and other financial instruments tend to come down much quicker than they go up. It’s getting close to the end of the trading day and you are trying to decide to whether to take a small loss and start the day fresh tomorrow or hold the stock overnight even though it is currently a losing position.

Many newer traders in this scenario allow both Greed and Fear to influence their decisions and they think since they loved their original purchase price and it’s now a bit below this, they do the mostly unthinkable, they buy more in order to average down their cost. For experienced traders who have booked significant profit, this can be profitable, but it is a very dangerous game and not for newbies or those not playing with profit, as quite often this play results in the stock gaping down and you spend the day trying to inch your way back to even.

The psychology of trading is something all traders need to learn how to master in order to become successful. Those who don’t won’t last very long and at the very least will keep the anti-acid manufacturers in business.

 

Noah Hochman

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Noah Hochman

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