Fear, Greed and How to Stay in Control

Fear, Greed and How to Stay in Control

When you start trading with a group of people, you might see people posting their profits and think to yourself: wow. This person really knows their stuff! In our group we see profits like this get posted on a daily basis. This example is not spectacular, we have multiple of these daily and some are much more impressive. They’re essentially meaningless.

Seeing that makes you want more and that’s understandable. However that’s also where most traders fail. As traders, we need to control our emotions, of which we have basically two: fear and greed.

Fear and greed are not a bad thing. We have them to protect us from danger and to seize opportunity. When trading however, it’s best to use logic and steer clear of becoming overly emotional. Both fear and greed can easily be very bad for your PnL (Profit and Loss), so how to handle these is worth some thought.

Emotions have different significance depending on whether they apply to the individual trader or to the market as a whole.

When the market makes a big move, indivudual traders get either greedy or fearful, depending on the direction of that move. Their emotions lead to bad decisions. Getting in too late with too much money or too much leverage is clearly the result of greed and it leads to losses. Greed is also a consequence of FOMO (Fear Of Missing Out). In this sense, fear and greed a really the same thing. As an individual, either emotion is bad news.

For a market as a whole, extreme fear and extreme greed are contrary indicators. When the public is extremely greedy and the charts go parabolic (vertical move up), there’s often a crash just around the corner. When I hear my neighbor enthusiastically talk about how he just started investing while the bull market is already well underway, I take that as an indication that a reversal might soon be upon us. Those who enter careless and late because they want to profit from something (that most likely already happened) will end up holding some bags.

Extreme fear happens when the market tanks hard and a lot of people are selling. In such cases you can safely expect the market to rebound and trade higher again soon (but not always!).

Both emotions are reliable contrary indicators. So much so in fact, that there is a crypto fear and greed index that can be used as a contrary indicator for market direction.

So how do you control your emotions? Here are some guidelines.

  • Only take trades that have a high probability of success
  • Never go by a single indicator, rather find congruence with multiple indicators for a higher probability of success
  • Apply risk management. Risk 1 to win 2, don’t risk 2 to win 1
  • Be strict with your risk management. Every trade has at least a stop-loss and if possible, a take-profit target.
  • Trade together with others. It gives you confidence and reduces both fear and greed
  • Don’t stare at the chart. If your setup is good, let it run (worst thing that can happen is you hit your stop-loss, but risk management makes this a controlled loss)
  • For every trade, explain to yourself why you entered it. Explain why you chose these particular parameters (entry, stop-loss, take profit) and revisit this information afterwards to see what worked and what didn’t
  • Don’t trade when you are stressed, sad, sick or distracted
  • Eat and sleep well, a healthy trader is more in control and ultimately more profitable

Fear and greed are healthy emotions, there’s nothing wrong with having them (zen wisdom aside). One of the essential skills in trading is to not let these emotions take over, but to control them instead. Rationally knowing that you’re doing it right is the best solution to keep your fear and greed under control.

If you want to learn more about risk management, pay us a visit at FilthyRichFutures.com and join our Discord at https://discord.gg/filthyrichfutures. We’re happy to tell you more about it.