Archives of “greed and fear” tag

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THE BEST OF JESSE LIVERMORE

  
  Education
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On emotions: 

The unsuccessful investor is best friends with hope, and hope skips along life’s path hand in hand with greed when it comes to the stock market. Once a stock trade is entered, hope springs to life. It is human nature to be positive, to hope for the best. Hope is an important survival technique. But hope, like its stock market cousin’s ignorance, greed, and fear, distorts reason. See the stock market only deals in facts, in reality, in reason, and the stock market is never wrong. Traders are wrong. Like the spinning of a roulette wheel, the little black ball tells the final outcome, not greed, fear or hope. The result is objective and final, with no appeal.
I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator; that hope, fear, and greed are always present, sitting on the edge of the psyche, waiting on the sidelines, waiting to jump into the action, plow into the game.
Fear keeps you from making as much money as you ought to.

On herd behavior:

I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of
contrary opinion.

On cash:

First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move….Second, it is the change in the major trend that hurts most speculators. (more…)

Discipline

  
  Education
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A day trader should leave no room for fear and greed to take over, otherwise, this will be the key to your losses. A good trader should be disciplined, make discipline a habit, and act in accord with trading systems/strategies. You can do your trade in a consistent and reliable manner this way. Certain situations require an individual to make decisions based on their pre-set criteria and parameters.

 You should make it a point to habitually follow your trading system/plan. When you’re making trading decisions, don’t let your emotions rule you. A day trader should always be disciplined, and once you attain your objective, leave the market first. Oftentimes people plunge in deeper because they are influenced by greed and fear.

 There are also day traders who are quite reluctant to lose money. For instance your stock goes down,and you’re still hoping that after some time it will rise again. And to your surprise, the share price goes further down. If only you were not reluctant to lose money, you could have sold it the first time its price went down, and prevent further loss.

 Day traders need to make fast executions and confirmations of the trade, so you must have a fast internet connection. They also need to receive and deliver quotes, news, and other pertinent market data. A fast internet connection allows you to make your day trading in a timely fashion. If you’re serious with your day trading. You would need hardware and software requirements to put a sufficient platform at home for online trading.

 You can practice through simulated trading before using real money. Here you can incorporate all your trading techniques and see if they actually work. Don’t be a scared to lose a certain amount of money. But it doesn’t mean that you should not limit your losses. Most importantly, you should learn from your past losses. Becoming a day trader is a simple thing. But in any case it requires dedication, time and effort. You will reap profits that you’ve never imagined, if you are able to put all of these things together.

What Greed and Fear do ?

  
  Education
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 What greed and fear do:

  • Not setting a stop when the method requires placing a stop (fear of taking a loss).
  • Moving a stop when it shouldn’t have been moved (fear of taking a loss).
  • Removing a stop when it was already in place (fear of taking a loss).
  • Taking profits too early when the signal to exit has not been given (fear of profits being taken).
  • Taking profits too late when the signal is already given (greed).
  • Chasing the market when the entry is already past or no signal was given (greed of missing profits).
  • Not making the entry when the signal is given (fear of losing again).
  • Buying the pullback that is no longer a pullback but a decline (greed based on judgment that it’s now cheaper) or short selling when the rally is now a continued primary direction (fear of losing).
  • Adding on a losing position, i.e. averaging down (fear of losing).

How does a trader go about trading without fear or greed? Although no one can really trade without them, the emotion will still be there, especially when the position is still on. However he can keep them under control by not acting on them.

                                            There are few solutions to this problem:

  1. Write a trading plan for each and every trade and referring to it when he feels the emotion is overtaking him.
  2. Keep a trading journal with each trade taken along with thoughts and emotions during the open position. Recording these moments will reveal how much or how little control he has over emotions that influence or interfering with his trading method.
  3. Use an automated trading system to avoid interacting and interfering with trading. When no trading decisions have to be taken, there is less of a tendency to interfere.
  4. Once the trade is taken and stops and targets are set, walk away from the trading station or go about with other tasks. Stay close and follow every up and down ticks will increase emotions and will eventually affect trading.
  5. Keep the Profits and Loss (P/L) columns out of the desktop. This is the most important factor of all emotions: counting money. By having it readily available emotion will be exaggerated swinging up and down according the profits or losses going up or down. Removing this information is especially recommended for day traders.
  6. Trade small size until emotions are under control. By doing this, it’s obvious that it’s not about making money but about trading the method properly. The further away the thought of money is, the better the emotions are kept at bay.
  7. If trading is technically-based, focus on the charts, not on the quotes windows. Scalpers spend so little time in a position that using quotes and ticks are a necessity. For other traders, these can only increase emotional states.

Robert Meier's Eleven Rules

  
  Education
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1. Ask yourself what you really want. Many traders lose money because subconsciously their goal is entertainment, not profits.

2. Assume personal trade responsibility for all actions. A defining trait of top performing traders is their willingness to assume personal responsibility for all trading decisions.

3. Keep it simple and consistent. Most speculators follow too many indicators and listen to so many different opinions that they are overwhelmed into action. Few people realize that many of the greatest traders of all time never rely on more than two or three core indicators and never listen to the opinions of others.

4. Have realistic expectations. When expectations are too high, it results in overtrading underfinanced positions, and very high levels of greed and fear – making objective decision-making impossible.

5. Learn to wait. Most of the time for most speculators, it is best to be out of the markets, unless you are in an option selling (writing) program. Generally, the part-time speculator will only encounter six to ten clear-cut major opportunities a year. These are the type of trades that savvy professionals train themselves to wait for.

6. Clearly understand the risk / reward ratio. The consensus is that trades with a one to three or one to four risk / reward ration are sufficient.

7. Always check the big picture. Before making any trade, check it against weekly and monthly as well as daily range charts. Frequently, this extra step will identify major longer-term zones of support and resistance that are not apparent on daily charts and that substantially change the perceived risk / reward ratio. Point & figure charts are particularly valuable in identifying breakouts from big congestion / accumulation formations. (more…)

Over Trading

  
  Education
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overtradingOvertrading is a major obstacle for profitability. People tend to overtrade when they don’t have a plan for the trading day/week.
If overtrading is a major issue for professional traders, lack of discipline is a major issue for developing traders. (more…)

Greed and Fear

  
  Education
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Greed and Fear are two of the strongest emotions that can have major influences on our trading behaviours and hence profitability.

We have all experienced these, from the inability to put a trade on to the gut ache seeing money on the table evaporate.

Recently I have been thinking of these two emotions in a different light. What I want to propose is that these two emotions have very different “time-frames” of operation, with respect to trading. Now I have
no detailed research or data to back this up, but I felt I’d put this out there and see what other traders thought…

Fear = Short Term = Most likely to be experienced before or soon after a trade is placed.

Greed = Longer Term = Emotion that plays a major role further into the trade timeline.

My rationale here is that it is FEAR that (some) people feel before putting on a trade, worrying if they should place the trade or not, once in a trade it is FEAR that makes them start hoping that it wont go
against them.

With GREED, I think this starts to come in later. For instance, if the position has become profitable, then starts to loose and become negative, it is GREED for the money that was on the table that keeps you
in the trade, not fear of loss. As it usually takes time for the trade to become profitable, the emotion of GREED by association is the emotion that takes longer to materialise. Indeed, I would argue that when
you think back to the trades ‘that could have been’, you are more likely to remember the trades that ‘could have’ made you a good return, rather than the quick losses you took?

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