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Greed, Fear, Hope, and Regret

There are four psychological states of emotions that drive most individual decision making in any market in the world. They are greed, fear, hope and regret.

Since the stock market is made up of individual human beings who tend to act in similar manners, a group is formed. It is only the group’s opinion that matters during a trend, but it is the individual trader’s job to identify the subtle clues as to when a market is about to shift direction.

The clues are there, but they are subtle. An awareness and detailed understanding of these emotions is what keeps the astute technical trader out of trouble by providing a means to identify individual weaknesses. We shall now take a closer look at these emotions, and provide examples of how they influence a trader’s ability to consistently make money.

What is Greed?

Greed is commonly defined as an excessive desire for money and wealth.

In trading terminology, it can specifically be defined as the desire for a trade to provide an immediate and unrealistic amount of profit. When greed sets in, all a trader can focus on is how much money they have made and how much more they could make by staying in the trade. However, there is a major fallacy with this type of reasoning. A profit is not realized until a position is closed.Until then, the swing trader only has a POTENTIAL profit (aka. “paper profit”). Greed also frequently leads to ignoring sound risk management practices.

What is Fear? (more…)

3 Lessons

classroomUnderstand the various scenarios that the market may present you and then plan your actions for each of them. That is preparation, not prediction. Prediction tends to bind you to one point of view because when that doesn’t come true, you don’t know what to do.

Always have an exit plan. Many people could have avoided the catastrophic losses they took in the markets this year if they, or their financial professionals, had engaged in stronger risk management practices, including the use of trailing stops

Understand the various scenarios that the market may present you and then plan your actions for each of them. That is preparation, not prediction. Prediction tends to bind you to one point of view because when that doesn’t come true, you don’t know what to do.