Role of Fear and Greed in Trading Psychology

by Debbie Harry

It does not matter how good your trading strategy is, and how much knowledge you have on trading, as there are other factors which will always influence your outcomes. They are your own emotions. The emotions of fear and greed plays a vital role in the trading psychology. These two factors can change a winning trader into a losing trader. It is very important for every trader to know about the role of fear and greed in trading psychology.

The role of fear: Fear is the emotion that prevents the trader from initiating a trade in the first place. Fear in trading basically takes on two basic forms such as, the fear of loss and the fear of missing out. The fear of loss changes the traders mindset to sell existing stocks/ positions prematurely and as a result, the traders are not able to get profits and recover full returns on their investments. They get fear to hold their positions for too long. It is very common in early stages of trading. Even if there is a possibility for winning, most of the traders due to their fear of losing they sell their positions. Therefore, they loose the chance of making profits in trading.
On the other hand, the fear of missing out also changes the traders mindset to abandon their rules, so that they do not loose out an another stock move. Due to this fear of missing out they can enter into the other stocks which are not there in their trading plan. Sometimes it can help for the trader, but always it is not good. Because when they are looking for other stock move, there is chance to lose on their existing stock.
However, these fears need to be dealt with, because they will impact a trader entry and exist decisions.

The role of greed: Greed is the motivation for over – confidence. Greed can raise traders expectations too high, by which, they abandon the rules of their trading system in the hope that more money will come in their way. Whenever a trader is getting in to winning position, then he is greatly influenced by greed. When a trader is greedy, he/she can make more and more buy and hold their positions even if they are getting loss in the hope of more profits to come. Sometimes it can be beneficial to the traders to wait for profits but not always.

In the above way, fear and greed play a vital role in trading psychology.

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