Psychology

Fear and Greed in Stock Market Trading

Why do most people enter the stock market? The answer is greed. Very few come to learn, the only goal is to make money.

Why do people rush to buy shares that Rakesh Jhunjhunwala has just bought? Again, it’s greed. They believe the shares Jhunjhunwala has bought, is certain to go up.

But what happens when the shares that Jhunjhunwala has bought, starts going down after your purchase? Fear and Panic. Disbelief that the company he has bought can also go down.

What happens when the share you buy at 100, falls to 85?

Fear takes over. You panic and you may sell. But what if it rises to 100 again after you sell? You regret your loss. Regret leads to greed in your next trade.

Fear and Greed is what drives the market. But traders who can set these two emotions aside, are the ones who go on to be successful in stock market trading.

The reason behind every decision to buy or sell should be based on your technical analysis. It has to be about what the charts tell you, not what you feel will happen.

The most important point: You need to combine your analysis with discipline.

Discipline is very very important.

Suppose you learn technical analysis and after analysing the chart of Reliance Industries, you decide to buy the shares at 1500. Your chart says the target is 1525 and your stop loss is 1490.

When the price of 1525 comes, you need to book your profit and move on from that trade.

If the price comes to 1490 – which is your stop loss – you cannot wait for a few more minutes to book your loss. You need to get out of the trade at 1490.

Strictly and with discipline. Every single time.

Following discipline will make you a fantastic trader in the long term. But indecision and hope that your loss will get lesser is indiscipline. These are like bad habits that you develop early in life, they become difficult to change when you grow up.

Similarly traders who don’t follow discipline in the first few years of trading, will eventually go on to be failed traders.

Ideally, the stop loss should be pre-entered in the system itself. So that the computer books the loss.

As soon as the decision comes within your control, your mind – fearing the loss – will push you to delay your sell decision.

The same with booking profits. When you buy at 1500 and your target price of 1525 comes. Your mind will make you greedy and make you believe that the price will go higher. This is usually when the trade begins to go wrong and the price begins to fall.

Another important point: Once you complete a trade i.e book your profit or loss. You need to put it out of your mind. You cannot carry the emotion of your previous trade into your next trade.

If you made a loss, you have to put the loss out of your mind before taking the next trading decision. Else, the loss will play on your mind and negatively influence your next trading decision.

Whenever you trade, read your mind and understand what emotions you are feeling. Constantly being aware of your emotions and trying to keep fear and greed out, will make you a better trader in the future!

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