Greed and fear are the major players in the stock market. These two emotions are the driving force behind almost all market participants – Institutional mangers, stockbrokers, Investors, traders and yourself.
You might be saying to yourself that greed and fear will never get in the way of my trading, but believe it or not they will be. It is not something to be ashamed of. It is something you have to admit to, come face to face with, If you are to become a successful stock trader or investor.
What do greed and fear look like in the stock market trading arena? “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffet
Fear doesn’t form in a vacuum. It is a learned response to a particular event or probability. In the case of trading, when you have a trade that goes bad, the regret and frustration can carry over into the NEXT trade. Or worse, the fear is so consuming, that you don’t enter your next trade. This particular problem is fueled by the expectation that every trade you enter should be profitable. If you truly believe that, then here is an important piece of information for you – not every trade will be profitable!
Greed creates the opposite problem. With a couple of consecutive winning trades, the ego can enlarge and feeling invincible overcomes being logical. This will ultimately lead you to trades that you normally would not have entered.
You have been watching a particular stock for some time now. It has set up perfectly, so you pull the trigger. You bought it at the perfect price and now it is moving higher just as you thought it would.
Now greed steps up to the plate and says to you, this is going to be a rocket ship. So you buy some more shares. Or your stock moves a few points and goes passed the price that you decided to get out. Greed tells you this baby is going higher tomorrow so you hang on.
When stocks make strong moves to the upside greed from all the cumulative market participants joins the move. Stock prices usually fall faster then they go up, and when this happens, fear now steps up to the plate.
Lets look at the example above, where your stock went through your get out price and you held on because greed was by your side. The next morning the stock price gaps down. Their is heavy selling all morning long. Greed is telling you to hang in there the price will come back. The price keeps going down, now you get a knot in your gut, and your knuckles are turning white. Fear is now by your side, but by now it is to late, your nice profit has turned into a loss.
Everyone goes through this until they have mastered the ugly faces of greed and fear. Master this and you are well on your way to becoming a successful stock trader.
Regardless of your current opinion, you are better served by feeling with your heart, while investing with your head. Are fear and greed driving your investment decisions right now, or or you in control of your emotions? If you’re not sure, I’d recommend taking a step back and looking at the market from a different angle……an unemotional one.