How To Control Fear And Greed In Trading

There is an old saying that the market is driven by fear and greed. Anyone that has placed more than a couple of trades will surely have experienced these two emotions.

All traders experience emotion. The distinction between a successful trader and an unsuccessful trader comes down to how they deal with that emotion. Let's look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios:

1. The trader's three previous trades have been losers. The unsuccessful trader will consider this before placing his next trade and be fearful that this trade will also end up a loser. This might result in a delay in placing the trade whilst waiting for the price to confirm that they were right - thus missing a perfectly good entry. They might suddenly discover that some other factor, previously unconsidered, is a reason not to enter the trade at all. Basically they will be fearful of another loss.

The successful trader will have tested their strategy extensively and will be aware that a series of losing trades is very probable. They will also measure their success on whether they place the trade according to their system rather than whether it is purely a winner or a loser. They trust their system and place the trade when the set-up occurs. The fear is removed from the trade because they know that several losers in a row is to be expected.

2. Once a trade is entered it immediately moves against the trader. The unsuccessful trader will fear that they have made a mistake. They fear making another loss so they wait and hope that the market moves back in their favour. The fear of taking another loss now controls their trading decisions, they might move their stop further out so the market doesn't take them out for a loss. They might ignore the trade, hoping that it will get back to at least breakeven - the daytrade becomes a position trade of a few days and then it becomes a long term 'buy and hold' strategy.

The successful trader, of course, will know from extensive testing of his system that such trades happen and that the trade might come round or it might hit the stop. His stop is in place and it will remain in place - the system dictates where the stop is, not the trader's fears.

3. Once a trade is entered it immediately moves strongly in the traders favour. The unsuccessful trader will suddenly see a villa in the sun or a new sports car flashing before his eyes. This trade is going to the moon so he removes his price target and decides to let it go. Greed has now completely taken over his trading decisions and the previous plan (if any) is ignored. Of course, markets rarely move in one direction for long and when the market turns the greed turns to fear as the dream slips away and the trader tries to hold on until the price gets back to where it was. The daytrade becomes a position trade...

The successful trader has set a target, either a certain price or a timed exit and will stick to it. If the trade only takes 5 minutes then that's just great, there's plenty that won't.

Fear and greed are human emotions - we can't do anything about that. But, when it comes to trading we need a way to control those emotions. Here's a few tips:

1. Know your system. If you have confidence in your system this helps to override those feelings of fear and greed. Confidence can only come from designing and extensively testing your own ideas. You can never be fully confident when you rely on someone else's tips or signals.

2. Automate your system. Computers do not suffer from fear and greed, they won't hold onto a loser praying for a miracle or screaming at the screen that the market is wrong - they'll just cut it if that is what the system says to do.

3. Money management. Quite simply, no matter how good your system you must only risk a sensible amount - and always money you can afford to lose.

Tim Wreford runs Online Futures Trading, a website that provides information and resources for traders. Tim also provides a free day trading system, the results of which are updated daily on the site.

Latest News


Currency Trading Market Conditions Remain Challenging: Breakout ...
Daily FX, NY - 15 hours ago
Sharp US Dollar gains have produced profits in several of our currency trading strategies on the week, and a continuation of US Dollar strength would make ...
US Dollar Forecast to Rally Against Euro, British Pound, Fall ... Daily FX
all 4 news articles

Voice of America
Treasury’s Lead Role in China in Flux
New York Times, United States - 2 hours ago
Besides, some noted, China’s currency, by maintaining its peg to the dollar, has risen in relation to the currencies of other trading partners because the ...
Yuan's Fall Watched Ahead of US-China Summit Wall Street Journal
China hopes talks with US boost coordination The Associated Press
Paulson Seeks to Broaden Access to China Wall Street Journal
all 237 news articles

Stocks drubbed at open
CNNMoney.com - 16 hours ago
US crude for January delivery tumbled $3.46 to $50.99 a barrel on the New York Mercantile Exchange. In currency trading, the dollar fell against the yen and ...

CCTV
Yen Strengthens as Manufacturing Slump Weakens Yuan, Ruble
Bloomberg - 16 hours ago
Bank Rossii, which manages the currency against a basket of dollars and euros to mitigate the effect of currency swings, widened the ruble’s trading band to ...
Dollar Rises as Global Manufacturing and Stock Markets Plunge International Business Times
Down Is Dollar's December Direction Wall Street Journal
Yen Extends Gains as Signs of Global Recession Sap Carry Trade Bloomberg
Bloomberg - Bloomberg
all 212 news articles

UK Pound Plunges, Gilts Rise as Data Add to Signs of Slump
Bloomberg - 13 hours ago
The British currency declined against all of its 16 major counterparts tracked by Bloomberg after property Web site Hometrack Ltd. said house values in ...

Yuan Falls to One-Month Low as China Seeks to Shore Up Economy
Bloomberg - Nov 30, 2008
“The central bank may want to test the market’s response to the possibility of a weaker yuan, but most likely it will keep the currency stable till the end ...
Yuan tumbles to end at bottom of band vs dollar Forex Pros
Yuan posts record low against dollar Commodity Online
Rate cut sees yuan decline Shanghai Daily
Bloomberg
all 13 news articles

New York Times
Some Nations That Spurned the Euro Reconsider
New York Times, United States - 1 hour ago
After turmoil in the currency markets nearly destroyed the currencies of Iceland and Poland, the two countries are rethinking their opposition to the euro. ...

AU Preview: Q3 GDP Should be Bo...
ForexTV.com, NY - 1 hour ago
Forex (or FX or off-exchange foreign currency futures and options) trading involves substantial risk of loss and is not suitable for every investor. ...

GLOBAL MARKETS-Grim economic outlook pummels stocks, oil slides
guardian.co.uk, UK - 9 hours ago
... also lifting the dollar, so it's possible the dollar will get a bit of a bid out of this, but currency trading is going to be choppy," Reid added. ...

Ruble Plunge Prompts Doubling of Reserve Spending, Survey Shows
Bloomberg - 6 hours ago
Bank Rossii buys and sells foreign currency to keep the ruble within a trading band against a basket comprised 55 percent of dollars and rest in euros. ...
Russian Stocks, Ruble Drop as Production Falls More Than in ’98 Bloomberg
all 8 news articles

Resources