Fear And Greed: Can’t Trade With It, Can’t Trade Without It.

Albert Einstein remarked, “Three great forces rule the world: stupidity, fear and greed.”

The stupidity referred to is well entrenched and documented in the actions of global governments and central bankers, especially the actions of the past two, five, ten, twenty, fifty years. Thus force number one, stupidity, has no bearing for my purposes in this missive, presuming there are no stupid market participants.

Stock market trading is a modern human endeavor.  However, stock market trading ignites two well-defined human biological phenomena known as nothing less powerful than fear and greed. This classic response to trading stress is known as the fight or flight behavior of not just our ancestors, but it is a quality that resides within us today… trader or not.

Trading is an activity controlled by these powerful human emotions. You won’t realize how powerful they are until you have skin in the game.

Webster’s dictionary defines fear as “an unpleasant, often strong emotion caused by anticipation or awareness of danger … it implies anxiety and usually the loss of courage.”

Fear of missing out in a trade, fear of losing, fear of getting out of or into a trade too early, all play mindgames with a normally logical person.

This is where I must interject the old saw that the market is not a logical place. Fear and greed sees to that.

Greed, says Webster’s, is “a selfish and excessive desire for more of something (as money) than is needed.”

Greed with a winning trade has it’s own issues. Held too long and greed may disembowel a great trade as it rolls over and the trader refuses to believe it. Many times this is the point where a trader might add to a once profitable position, since it was so successful initially. If you think that one through, price may indeed reverse and continue that winning trend. On the other hand, that price may be on it’s way to zero.

Time to interject yet another old saw, every minute of every day is a new market. If you don’t appreciate that comment, we need to talk.

Do you understand why you and others are fearful or greedy?  Traders, money managers, beginners and experienced alike trade on these emotions. Since fear and greed is as much as 90% of what trading is all about its importance is significant.

By the way, the other 10% in trading has to do with the mundane, and obviously no longer useful, fundamentals of the security under consideration. I refer you back to the paragraph above about governments and central banks as to why this is so.

You probably thought trading was about price, right? Wrong, trigger happy trader.

Let’s start calling Fear- Resistance, and Greed will be called “Support” on our charts.  How do we know where that is on a chart?  Pull up any chart on any security. Fear is the point at which the price stops going up and greed is the point at which it stops going down.

In the markets, fear and greed bring out the extremes in human behavior. Ironically, this is the very ammunition a trader looks for.  It is a good thing for traders as it provides new opportunity every minute of every single day. It is a bad thing if you let fear and greed control you. Your goal, assuming you have your fear and greed under control, is to recognize it in the price and volume action.

All traders are watching their screens and they think the same thoughts as they watch the candlestick bars build on each other forming new patterns.  There is always the fear of getting into a trade, the fear of missing a trade, the fear of getting in/out too early or too late, the fear of losing, the fear of being at risk.  Fear of failure.  Fear of success.  There are other subtle fears at play as well.

There is the greed that comes with anticipation or expectations (real or hyped up in your own mind); the greed that comes with having a winner on your hands and staying with it for that last .25 cents;  the greed that is supported with news, rumors, internet chatter, the greed that comes from a gambler’s perspective …bigger bet/bigger reward.  How about the greed of feeding your ego (“I know I’m right”)?  There are other subtle variations of greed at play as well.

Amateur market participants trade on emotions, traders trade on discipline taking advantage of that situation.

Much is written about fear and greed in the market and  what is said on either side will be true for the most part and somehow contradictory simultaneously.  This makes for volatility in the price action.  It is a phenomenon that can only be observed and must be participated in to be fully appreciated.  But this is what trading is all about…master yourself, your emotions, first, then work with bigger money.

So the question becomes, how well do you know yourself as an investor, as a trader, as a risk taker?  This question, in my opinion, is one that will be answered over time, by allowing yourself to evolve into a trader type, i.e., aggressive, conservative, swing, position, etc., over time.  I feel you are doing yourself a disservice if you adamantly approach trading, never having traded before, as a conservative or aggressive trader.  Let the real world and your experiences guide you in that regard as you experience fear and greed.  You may find months from now that you are trading very differently from what you thought you were going to do.

The market is never wrong, opinions often are. As a result trading involves training and controlled behavior. That means having a trade plan where control is obtained by enforcing trading executions for entry and exit strategies, 

A trade plan provides the rules of engagement and authority (the markets are always right).  The reason traders use stop-loss orders is because they work.  Gaps notwithstanding, stops are the best way to take you and your emotions out of a trade.  Use stops.  The one time you lose because you did not use a stop is the lesson you will have taught yourself to do so.  Let them do the work while you search for new trades.  

Discipline (a trade plan) is what will make you take a profit at the right time, get out with a small loss at the right time, wait for the right entry point or perhaps not trade at all. When you can walk away from a trade where you left money on the table or you saved yourself a bundle or where you missed a big, big move without whining about it, you’re on your way to self-control.

This is incredibly important and the way to master this is to focus on not losing instead of focusing on the potential profit.  Let me repeat that:  focus on not losing rather than the potential profit.  Take care of your funds, your asset base, remember, it’s the commodity of your trading business.  No money, no trading, no business.  Profits will follow if you at least follow this rule regarding money management.  I think I can safely guarantee that rule.

Remember, it is large sums of money from the mutual funds, pension funds, banks, and money managers that drive the markets.  They too work in this environment.  Are they immune from emotions?  Does their job performance depend on their portfolio’s performance?  Don’t they have to answer to their board of directors, their shareholders?  Programmed trading is still made up of humans doing the programming. The elements of fear and greed are alive and well for all players.

After this discussion and regarding our current situation in our beloved and much maligned  stock market, all I can say is: the only thing we have to fear is the lack of fear itself.

Visit me at www.wallstwise.com

About wallstreetpirate

Thirty-five years in financial services from insurance to registered investment adviser, and trader (now retired). Currently helping wanna-be traders and experienced alike as a trading coach and mentor. I've been in and around, on top of, in the middle of, and on the bottom of the stock market for a long, long time. Here's all I've learned: Trading is about behavior, psychology, and appreciating what the charts are saying technically. You can't fake it. Either you know what you're doing or you don't. And as much as this isn't rocket science, it takes knowledge and a skill set to survive.
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