| Dear Fellow-Trader. | | | | As individuals we have to realize and accept that we |
| This is a topic that is crucial and vitally important to | | | | have no control and influence over the market nor the |
| trading. | | | | direction its taking. And thus, there are two crucial |
| Its a Market of Emotions and 90% of all trading is | | | | emotions that come into play and that we have to be |
| based on psychology! | | | | aware of. Fear and Greed! |
| Thats a fact just like it is a fact that 90% of all traders | | | | Fear: |
| who ever trade lose money and that 10% actually | | | | The problem is that we all want to succeed and when |
| make a total loss going bankrupt. If the first number | | | | we do make a loss, it is easy to let those losses |
| doesn't set off your alarm bells then the second | | | | effect us emotionally out of fear to lose even more. |
| definitely should. | | | | In this case, a trader exits a trade as soon as the |
| But why is it then that such a large number of traders | | | | market hits the slightest bump even though the broad |
| get driven by psychology and fail? Intelligent people | | | | market is very bullish and the fundamentals of the |
| with a high level of education watch their trading | | | | company hes trading are good. So instead of being |
| accounts erode taking one loss after the other. | | | | patient and waiting for the trade to go up again, he |
| So why do traders fail? | | | | sells and accepts the initial loss out of fear of losing |
| Without Education And an Understanding of The | | | | even more. |
| Psychology of The Market Your Chances of | | | | Fear of losses can also show up in the following way. |
| Profitable Trading are Profoundly Limited! | | | | Irrespective of any rationality, a trader holds on to a |
| While the trading instruments that make up the market | | | | losing position for too long hoping for it to go up again. |
| have no emotions, the individuals that trade those | | | | Even when the news and fundamentals are hopeless |
| instruments are human beings and are very emotional | | | | he wont give up forgetting that this attitude can easily |
| by nature. Realizing that the human emotions of fear | | | | lead to a total loss. |
| and greed often drive prices up and down, allows one | | | | In another case, fear can also manifest itself in not |
| to begin to understand how to position oneself on the | | | | wanting to miss the boat and quickly jumping on. This |
| right side of the market. Because humans are very | | | | can very often be observed by novices who listen to |
| emotional, they often make rash decisions that end up | | | | tips from friends and TV, where so called experts or |
| being the wrong decision. | | | | shall I rather say, opinion makers speak up trying to |
| Every day theres huge struggle being waged in the | | | | sweet-talk you into a trade. |
| markets. A struggle between the bulls (buyers and the | | | | A trader sees the market go up rapidly and |
| bears (sellers). Bears want to get top dollars for their | | | | confirmation is all over the news. The excitement of a |
| equity, while the bulls want to pay as little as possible. In | | | | rising market is in full swing. Afraid of missing out, the |
| order for a transaction to be completed, one has to | | | | trader makes a hasty decision and dives right into a |
| give into the others terms. If a greedy bull gives into a | | | | trade. |
| sellers terms because he feels he just has to own | | | | Greed: |
| XYZ stock, the price goes up. If an eager bear gives | | | | Becoming euphoric when you hit a winning trade is |
| into a buyers terms, the price goes down. This is | | | | almost as detrimental as becoming depressed when |
| nothing new. Its basic economics. Its supply and | | | | you have a losing trade. |
| demand. | | | | In this case a trader is actually afraid of losing a profit. |
| Because both buyers and sellers are, more often than | | | | He holds on to a winning position for too long. His trade |
| not, basing their buying and selling decisions on | | | | is doing so well that he just cant get enough. He may |
| emotions, eventually these emotions will culminate and | | | | have made a 100% profit and now expects to make |
| a trend will reverse. For example, when a stock is in | | | | another 100%. And when his position goes down |
| an uptrend, there will be a point when the trend will | | | | below this magic mark, he still holds on hoping for his |
| become apparent to everyone. At this point there will | | | | trade to go back to 100% again before he sells instead |
| often be one last buying frenzy as greed takes over in | | | | of accepting say, 90%, which is darn good too! |
| fear of missing the boat. It is precisely at this point that | | | | But what was a 100% profit can easily become a total |
| the trend will often reverse. | | | | loss if you let greed take control! |
| The same is true of a downtrend. Before a stock hits | | | | Ive seen traders that have watched their profits erode |
| bottom, there usually is a panic-kind-of-selling as fear | | | | without doing anything about it. They held on to their |
| takes over and the weak run for cover. Once all the | | | | positions right up to an almost total loss. Very often |
| weak have thrown in the towel, the stock is free to | | | | they then say: Oh well. my trade has gone down so |
| rise again. This behaviour can be observed time and | | | | much now, whats the use of selling? I wont get much |
| time again. | | | | out of it now anyway, so I might as well keep my |
| Often a stock doesnt just drop because everyone | | | | position. Well, I guess in a way hes right because by |
| starts selling. It begins to drop because everyone stops | | | | this time his stocks may have more value being used |
| buying, at which point the price has to come down to | | | | as wall-paper. |
| entice more buyers. As the price begins to decline, the | | | | In another case, fear of losing out on a profit may |
| selling begins to pick up, forcing the price even lower. It | | | | even cause a trader to sell a winning trade too soon. |
| isnt until all the sellers are flushed out of the market | | | | As soon as his position went up a few percent, he |
| that the selling stops. Now the demand for the stock | | | | bails out. |
| becomes greater causing it to rise again and attracting | | | | So watch out for fear and greed. These two guys |
| more and more buyers. | | | | arent good advisers and theyre not the way to trade! |
| If you have ever looked at a significant market bottom | | | | And so. As traders we have to be rather impartial. |
| like the one after September 11, 2001 (9/11), you will | | | | We have to accept that there will be losses just as |
| notice that the selling pressure increased significantly | | | | there will be wins in any ones trading career! |
| due to the emotional insecurity of what might happen | | | | Reaching the stage where you can comfortably |
| next. Once the selling became exhausted, prices | | | | accept losses, and knowing that you have a good |
| stabalized and the crowd began to buy the market in | | | | trading system that will also produce profits most |
| droves. | | | | times in the longer term is the state we all have to |
| Getting A Grip On Emotions | | | | aspire to. |