Introduction

Demand and supply are believed to be the primary drivers in a financial market. However, two psychological factors that buy into this equation are fear and greed. These are the most basic human emotions, and we all experience them at some point. These emotions can be detrimental to you as an investor because they are the differences between success and failure while trading.

Unfortunately, most of us are not aware when our investment decisions are fuelled by these emotions instead of analytical and rational thinking. So, learning to manage them is necessary to become a successful trader. Read on to learn more about how fear and greed present themselves in trading and simple tips you can use to overcome them.

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Understanding Fear in Trading

Fear is a basic emotion triggered when we feel threatened or scared. It triggers our fight-or-flight instinct. However, fear can also be triggered by real and imagined circumstances. So, even when something you fear isn’t happening in the present, simply thinking about it can make you afraid.

While investing, fear can stem from the thought of losing money or the market not performing as you expected. The former is natural and relatively easy to overcome, while the latter is tough because this fear never really goes away. After all, there will be times when the market underperforms. So, the best way to overcome it is by setting realistic expectations.

Understanding Greed in Trading

An intense desire for something or more of something is known as greed. You might have several clothes, but the urge to buy more, even when you don’t need them, comes from greed. This emotion also presents itself while trading and can be detrimental to success. Usually, it makes us do more than we should.

While trading, greed takes on two forms. The first is to hold on to your money strongly, and the second is to earn more. When regulated, greed helps us do better. When left unchecked, it can be the reason for our downfall. For instance, as a trader you might leverage more than you have on a position because it’s on an upward swing. However, not knowing when to quit might mean you sustain a loss just because you don’t know when to quit. Similarly, the desire to strongly hold on to the money you have might prevent you from taking calculated risks needed to succeed.

Overcome Fear and Greed to Become a Smart Trader

Everyone experiences fear and greed while trading. The tips given below can help you tackle both these emotions and become a smart and successful trader.

• Start With a Plan

Before you begin trading, always have a plan, especially a written one. This is an anchor and helps stay on track when emotions take over. To prevent emotion-driven decision-making while trading, have a plan. Whether over leveraging or doubling down on a poor position, a plan can overcome this.

• Maintain a Journal

A simple way to keep your emotions in check is to increase your accountability. With this in mind, maintain a trading journal. Keep track of your investments in it. Note your daily observations about your investments, the market, returns, and the investment horizon. It helps rein in your emotions and analyse your trading decisions, too.

• Change Your Mindset

A get-rich-quick mentality is detrimental to success in the stock market. Even seasoned investors such as Warren Buffet had to wait years before succeeding. Letting go of this mentality prevents rash decisions. Understand that no one can succeed overnight because investing is not a sprint but a marathon.

• Never Stop Learning

There is no such thing as knowing everything. Whether you are a beginner or a veteran in the stock market, never stop learning. Financial markets, like everything else, keep evolving and changing. To keep up with its dynamic nature, constant learning is key. For instance, some companies might have paid regular dividends in the past, and it made sense to invest in them. However, holding on to them is not a rational decision if they no longer provide much of a return.

Conclusion

Most traders experience fear or greed while trading. However, the successful ones know how to keep these emotions at bay while making investment decisions. Developing a plan and trading system and becoming disciplined while trading will improve rational instead of emotion-fuelled decision-making. Keeping your emotions in check while trading will bring you closer to achieving your investment objectives without overexposing yourself to easily mitigate risks.

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