How To Control Fear And Greed In Trading

There is an old saying that the market is driven by fear and greed. Anyone who has placed more than a couple of trades certainly has experienced these two emotions.

All marketers experience the thrill. The distinction between a successful marketer and an unsuccessful marketer comes down to how they deal with this emotion. Let's look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios:

1. The three previous traders' trades were losers. The unsuccessful trader will consider this before placing their next trade and be afraid that this trade will also end up a loser. This can result in a delay in placing the trade while waiting for the price to confirm that they were right – thus, losing a perfectly good entry. They may suddenly discover that some other factor, previously disregarded, is a reason not to go into the trade at all. Basically they will be afraid of another loss.

The successful trader will have tested his strategy extensively and will be aware that a series of losing trades is very likely. They will also measure your success in knowing if they put the trade according to your system, and whether you are purely a winner or a loser. They rely on your system and put the trade when the set-up occurs. Fear is removed from the trade because they know that several losers in a row is to be expected.

2. Once a trade is entered it immediately moves against the merchant. The unsuccessful trader will fear that they have made a mistake. They fear making another loss so they wait and hope that the market moves back in their favor. The fear of taking another loss now controls your trading decisions; they can move your stop further so that the market does not lead them to a loss. They can ignore the trade, hoping that it will return to at least breakeven – the daytrade becomes a trading position a few days, and then becomes a long-term "buy and hold" strategy

Of course, it will know through extensive testing of your system that such negotiations happen and that trade may come back or it may hit the halt. Your stop is in place and it will remain in place – the system dictates where the stop is, not the trader's fears.

3. Once a trade is entered immediately it moves strongly in the favor of the traders. The unsuccessful trader suddenly sees a house in the sun or a new sport car flashing before his eyes. This trade is going to the moon, so it removes its target price and decides to let it go. Greed now has completely taken over your trading decisions and the previous plan (if any) is ignored. Of course, markets rarely move in one direction for too long and when the market turns greed turns into fear as the dream slips and the trader tries to hold on until the price gets back to where it was. Daytrade becomes a position trade.

Successful trader has set a target, a certain price or a timed exit and it will stick to you. If the trade takes only 5 minutes, then this is great, there is a lot that does not.

Fear and greed are human emotions – we can not do anything about it. But when it comes to trading, we need a way to control those emotions. Here are some tips:

1. Get to know your system. If you have confidence in your system this helps to replace those feelings of fear and greed. Trust can only come from designing and testing your own ideas extensively. You may never be fully confident when you rely on other person's tips or signs.

2. Automate your system. Computers do not suffer from fear and greed, they do not cling to a loser praying for a miracle or shouting at the screen that the market is wrong – they'll just cut it if that's what the system says to do

] 3. Money management. Quite simply, no matter how good your system you should only risk a sensible amount – and always money that you can afford to lose.

Source by Tim Wreford

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