by Fear and Greed in Stock Market
Fear:-
- According to the Dictionary definition, Fear is a “distressing emotion aroused by impending danger, evil, pain, etc. or the condition of being afraid.” Here, what you need to look at is whether the threat is real or imagined. In trading, the threat is just imagined. This fear prompts us to make unfruitful decisions.
- We know that fear is somewhat related to the fight-or-flight instinct that exists in every one of us. It is what we feel when we recognize a threat. Traders experience fear when positions move against them as this poses a threat to the trading account.
- Watching a position move against you invokes the fear of realizing that loss and so traders tend to hold on to losing positions for much longer than they should.
Greed:-
- According to Dictionary definition, Greed is an intense desire for something. This is high, especially for the wealthy.
- There’s no greed when we do not have any positions in the market. Greed negatively influences trading decisions in a winning trade.
- Fear and Greed in Stock Market, Greed is very different to fear but can easily land traders in as much hardship if not managed appropriately.
- It tends to arise when a trader decides to take advantage of a winning trade by devoting more money to the same trade, in the hope that the market will continue to move in the trader’s favor.
- Greed can also surface when traders experience a losing trade and decide to ‘double down, in the hope that throwing more money at the problem will help the position turn positive.
- From a risk management point of view, this is very risky if the market continues to move against the trader and can quickly turn into a margin call.
Example of Fear and Greed in the Stock Market are as follows:-
Let’s say you have bought a stock of 1000 rupees. Now it would be possible for either stock to go in an upward direction or go in a downward direction.
Let’s Consider the First Scenario Fear and Greed in Stock Market:-
- The stock has been moved to Downward direction:-
- If the stock goes bearish which means trade has been executed in the opposite direction you might have a logical stop loss of 995 which is 5 rupees.
- This is the perfect scenario where fear arrives once we see our profit and loss statement.
- The first thing which comes to mind is that yesterday I traded it just kissed a stop loss and then it booms in the upward direction here comes Fear and Greed in Stock Market.
- Today also it is going to happen the same so do I increase the stop loss or remove the stop loss person starts over thinking there might be a possibility that a newbie trader will increase the stop loss.
- Whereas a professional trader wouldn’t make this kind of mistake as he knows that today may not be his day or that the homework he has been doing went in his opposite direction and he will be happy after giving a stop loss.
- But New Traders are going to fight with the market until and unless their account gets wiped out by the operators.
Let’s Consider the Second Scenario of Fear and Greed in Stock Market:-
- The stock has been moved in an Upward direction:-
- If the Stock is bullish which means trade has executed in our direction you might have a logical target of 110 which is 10 rupees.
- This is the perfect scenario where greed arrives once we see our profit and loss statement.
- The first thing which comes to our mind is that it might not be given up to 10 rupees so let me exit from here.
- So do I decrease the Target or Exit in the market price, the person starts over thinking there is a possibility that a newbie trader will decrease the target.
- Whereas a professional trader wouldn’t do this kind of mistake as he knows proper risk-reward ratio is the only way to sustain in this market.
- The homework he has been doing went in his direction and he will be happy after taking a proper risk-reward ratio.
- But newbie traders are going to think that yesterday I lost this much amount so today I need to get more profit than yesterday’s loss.
- So they are going to fight with the market to cover yesterday’s loss and gain some profit but at the end of the day either their gains become zero or they might lose multiple times their profits.
How to Overcome from Fear and Greed in the Stock Market & How to Become a Successful Trader?
There are many ways to overcome fear and greed & to become a successful trader are as follows:-
- Have a Proper Trading Plan:
New Traders Must have a proper trading plan to avoid losses in their trading journey.
If one is having a proper plan but won’t be able to execute properly then might be he is lacking emotionally.
Some examples of this include: overleveraging, removing stop loss on losing positions, Averaging on losing positions here comes Fear and Greed in Stock Market. - Lower Position Size:
If you are a newbie trader then you must have to follow a proper position sizing to overcome fear and greed.
New traders must trade with one lot at the beginning of their career to avoid losses.
One of the easiest ways to decrease the emotional effect of your trades is to lower your trade size.
- Proper Risk Reward:
Traders must follow the proper risk-reward ratio to become profitable in the market.
If they don’t follow the proper risk-reward ratio they won’t be able to get themselves on the Profitable side.
So at least traders should go for this risk-reward ratio of 1:2. For new traders, this is the best risk-reward ratio. - Profitable Systems/Strategies:
There are many strategies or systems in the market. New traders should follow at least one system for months to see the success of that system.
Most of the traders do not follow one system or strategy for a long period. If they are profitable they will follow those strategies until and unless loss happens.
If Multiple times loss happens from those strategies then they will switch to other strategies.
So try to follow one system for a longer duration of time with a proper risk-reward ratio to become a successful trader. - Keep a Trading Journal
Trades should have a trading journal with them. Traders should write each and everything that happens with them while trading throughout the day.
Every point to be noted down in their trading journal.
Traders should go through their trading journals before going to bed and try to improvise from mistakes and come back stronger on the next day of the trading Session. - Learn and then Earn
New traders should first try to learn each concept very well then only they need to think about earning from the stock market.
As the stock market is based on different parameters is Analysis, Money Management, Risk Reward Ratio, and Profitable Strategy.
Research shows that emotion plays a significant part in trading, as it was found that on average, traders lost money even though there were more winning trades than losing trades.
This was because the losing trades outweighed winning trades i.e. traders stood to lose more when the market went against them than they would receive if the market moved in the traders’ direction.
Traders can look to tackle fear and greed in trading by instituting the thesis from this research, stated by David Rodriguez as:
‘Traders are right more than 50% of the time but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.’
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