Understanding Fear and Greed
In a previous post we talked about lack of a trading plan being one of the reasons traders lose money while trading.
In this post we’re going to talk about one of the other reasons; and that is the inability to trade profitably due to emotions such as fear and greed.
How do we control Fear and Greed?
If we want to solve a problem, it often helps to break it down into smaller, more ‘bite-size’ chunks and tackle each of those. It’s like the old line “how do you eat an elephant?” The answer of course is; “one bite at a time.”
So if we’re going to work on our trading psychology let’s talk about fear first and try to identify what it is that we’re fearful of.
Open up your notepad now and start making a list of your fears. Here are some ideas to start with:
* we fear that the market is going to move against us as soon as we place the trade.. (eg, “We’re unlucky, it happens every time!”)
* we fear that even if the trade does start to move the right way, that it’ll turn around any minute now… (eg, “There, see! It just dropped a point! I knew it!”)
* we fear that our trading system doesn’t work, or that the tip we were given was a dud.. (eg, “why did I follow their advice?”)
* we fear that we don’t know enough and so won’t know when or even how to respond to the markets movements.. (eg, “Should I close or roll now or tomorrow? Oh no, it’s just dropped again..”, “Maybe if I just added this other indicator to the chart that will give me a better entry..?”)
And so on… Did any of those comments sound like anything you might say to yourself? If so, add them to your list.
It all comes down to the fear of losing money, but try to break that fear down into more specific ‘bite-size’ fears as above.
Now just in case fear wasn’t enough to worry about, we also have the effects of greed on our mindset to consider.
The dream of wealth and riches is what can lure people to trading, but it is greed that has people placing trades before they have completed their trading education, before they have developed their trading plan (and money management strategy), and before they have properly backtested and paper traded their trading system.
It is also greed that has them over-trading, and believing that a few wins means they must have found the holy grail and can now ignore the money management strategy they implemented to preserve their trading capital.
So now that we’ve identified our fears and understand our greed a little better - how can we control them?
…Stay tuned for my next post!
I know, I know, you want the information now - but look on the bright side! It’ll be posted in a few days and that will give you plenty of time to open up notepad and start making a list of your trading fears while you’re waiting.
Happy Trading
Brian Dibbins
Trade Profitably © 2006 - 2007
29th June 2007
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