Trading Psychology – Overcoming Fear and Greed

When a trader gets caught up in the never ending cycle of unsuccessful deals and bad judgement, it can be hard to snap out of it and handle the situation rationally. Let’s look at the components that make a trader’s psychology and see what the trader may do to improve it.

Understanding fear 

Fear of losing comes from an understandable place. But it can be extremely harmful as it deprives a trader from the ability to make rational decisions, moreover, fear can turn into anger and self-deprecation. It is important to understand that fear is a natural reaction to a threat. Fear does not always reflect the gravity of the situation: quite often fear is exaggerated and unnecessary. 

One more type of fear is FOMO – fear of missing out. It leads a trader to making rushed decisions ruled by the fear of not taking advantage of something that everyone around is seemingly doing. FOMO traders may Buy high and Sell low as they do not understand the market, their decisions are influenced by panic and confusion.

Facing greed 

Another extreme on the trader’s mood scale is greed. This emotion makes traders take higher risk when it could be avoided, for example, keep successful deals longer, until the trend reverses and annuls the outcome. And when greed is fueled by fear, it can lead to serious consequences.

It is not easy to overcome greed and it is rarely possible to fully take it under control. It will still manifest itself in certain thoughts like “if I open one more deal, I might just have a better outcome!”. But recognizing that and reflecting on such thoughts is a step towards a more conscious trading approach.

How to cope?

Coping with emotions is a task that should be prioritized. To maintain a healthy trading psychology, one should create a set of rules and follow them closely. Such rules may include the target – final results that a trader is aiming for, the risk management tools like stop loss and trading balance restrictions. It may also have a detailed instruction regarding the trading plan, that describes the conditions for entries and exits. It is possible to set an amount of acceptable loss and desired outcome for a day, as well.

Such a set of rules will help a trader set certain responsibility standards, which they may use as guidelines in moments of emotional instability. It could be helpful to turn to such a set of rules in moments of fear or greed and evaluate the decisions a trader is about to make in comparison to the written plan.

What else can be done?

Besides setting rules, traders may also track their performance and evaluate it over a certain period of time. Tracking one’s mental state could also be helpful, as it allows one to strategize against harmful emotions in the future. Looking back at the trading activity and adjusting the current approach accordingly is a productive approach that many experienced traders use.

Gaining professional experience in trading also helps control the irrational behavior – novice traders may want to spend more time learning about the market. That could potentially help them feel more confident and less influenced by emotions.