Trading Psychology - Greed & Fear

[mohsinqureshii 10]

Besides all of the fundamental and technical factors a trader must keep track of in order to be successful, there is another area which is often overlooked – themselves.

 

No matter how good your strategy is, the other factor which will always influence your outcomes are your own emotions. After all, it is emotions that move the markets. Emotions are what most of our indicators are designed to give us a measurement of. And in order to be able to profit on market movements created by the emotions of others, you must first learn how to read the mood behind the move, and also how recognize and control your own.

 

Greed

 

As prices rise, they naturally attract more attention. As more and more people jump onboard the rally, its climb accelerates. But in all the excitement, there is a tendency to confuse account balance (the amount actually on your account) with account equity (the total value including the sum of your open positions). People begin to treat their potential profits as if they were already realized. This expectation can sometimes cause basic reversal signals to be overlooked.

 

Additionally, those who missed out on the opportunity early on, when the trend was still young, are becoming hypnotized by the length and size of the rally. Jumping onboard late is a risky game, however, as those who got in early will eventually need to take their profits. There is also a bit of the “greater fool” factor, as anyone who is still buying is now buying at a higher price, and from a seller who has reason to believe the move may soon be over. The idea then is that hopefully someone will keep on buying after you, at an even higher price, when you eventually decide to become a seller yourself.

 

Fear

 

When prices start falling, they awaken fear and panic. Fear is one of our most primal emotions, which explains why prices often fall faster than they rise. People holding longs run for the door trying to sell as quickly as possible, and short sellers motivated by the falling prices add their own orders to the mix as well. When those short orders are eventually covered in order to realize profit, there are temporary rallies which can give false hopes.

 

This crowd mentality frequently creates moments of market imbalance which can be capitalized upon, once one can learn to recognize the signs and interpret them correctly. Above all else, the key to developing this skill is practice.

 

How Emotions Manifest on Charts

 

One of the key measurements of market sentiment is support and resistance. If resistance breaks, there are more bulls in the market at that time than bears. If it bounces, we know the bears have overpowered the bulls. Likewise, if a support level holds, we know that any drops in price were most likely caused by routine profit-taking. If it breaks, on the other hand, we know we have short sellers entering the market along with longs starting to close their positions.

 

Another indicator that mood and sentiment in the market may be beginning to change is momentum. Declines in follow-through on moves can often signal a drop in enthusiasm and increased likelihood of a pending reversal. Both trend following and oscillating indicators can give us some clues and insights in this regard, especially as divergences begin to appear on the chart.

 

Lastly, there is volume. Often overlooked on forex charts due to the lack of a centralized exchange (though still worth paying attention to even if it is only the volume from your own broker), volume should typically increase as trends accelerate in either direction. If volume suddenly starts to drop off, it can signal an impending end to the trend in question, or at least some turbulent times ahead.

[wrbtrader 10]

...Besides all of the fundamental and technical factors a trader must keep track of in order to be successful, there is another area which is often overlooked – themselves.

 

No matter how good your strategy is, the other factor which will always influence your outcomes are your own emotions. After all, it is emotions that move the markets. Emotions are what most of our indicators are designed to give us a measurement of. And in order to be able to profit on market movements created by the emotions of others, you must first learn how to read the mood behind the move, and also how recognize and control your own...

 

This is a critical issue for discretionary traders (I'm one of them) that merges fundamentals, market psychology with technical analysis to form what's called market context prior to the appearance of any trade signals.

 

Therefore, although you said it differently, the markets move due to factors beyond technical analysis alone and before we can exploit the price action via our trade strategies...we must first learn how to read the mood behind the move along with being able to understand ourselves as traders to be able to exploit these price actions we're applying our trade strategies within.

 

That's why I say to other fellow discretionary traders (traders not using automation or codes), profitable trading involves a lot more than just trade signals.

[henryduncan12 10]

Thanks mohsinqureshii to share such article with us. I have read many articles about "Trading Psychology - Fear" but there was no information about Greed.