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‘Fear and Greed -- Are They Always Negative Emotions?’
There are many phrases relating to trading like the obvious 'buy low, sell high,' but how many traders actually understand how fear and greed drive the markets?
The pros and cons of simulated trading and the essentials of money management will be discussed due to these aspects being related to the emotions of fear and greed in trading.
Basically the aim of this article is to shed some light on emotions in trading and how they can be handled by traders.
Most traders know these emotions cause movements in market prices but it's wrong to think that these are always negative emotions.
Let's look at greed first. Greed is good! Well a certain amount of greed is good because it's needed to make speculators want to trade in the first place.
A downside to greed is when it causes traders to 'chase the market,' for example by buying after a large sudden move higher when the market is overbought (i.e. overvalued).
You also need to avoid being too greedy when exiting your trades i.e. you should take profits where your proven trading method says you should.
Fear can be a positive and negative emotion too. Fear is a very good thing when it causes you to close out any losers with discipline where your system tells you to. But not too early or too late.
On the other hand, too much fear can stop you from even entering a trade the moment your system tells you to.
To overcome this fear it's best to paper trade or make simulated trades for a while before dipping your toes in the water.
Paper trading is something that most traders don't like doing before they first start to trade for real because they want to get out there in the markets pulling in money.
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Paper Trading and Good Money Management
But it's important to test your trading methods first by paper trading as this will help you 'pull the trigger' and commit more easily to trades when the time comes to trade for real.
The main problem with paper trading though is that you don't get as exposed to the emotions of trading as you do when trading for real.
Therefore, it can only prepare you to a limited extent.
Using safe money management techniques also helps you overcome the fear of entering trades. The exact money management rules you use will depend on your trading system.
Generally speaking a good rule is to use no more than 2- 5% of your initial trading capital per trade.
Then only increase the amount you are risking per trade once you've doubled your initial trading capital..
But still risking no more than 2- 5% of your new level of trading funds per trade.
To sum up, yes you can make big money from trading but it's a marathon not a sprint.
You'll need to have realistic expectations and not give in to too much greed.
Some greed is good in this walk of life or you would never enter a trade! But don't be too greedy -- just take profits where your proven method tells you to.
And of course, taking the occasional loss really isn't a problem -- it's part of this business, just don't let them run.
Before and during each trade tell yourself 'I must protect my account.'
Gradually increasing the size of your trades as described is one of the keys to success.
Finally, using a proven trading system will also reduce any fear when entering trades.
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