Fear and greed in forex trading
There once was a normal human being.
He wanted to become a trader. Forex, indices, commodities, options, it did not matter. He eventually chose forex because the promises of profits were more impressive. The promises of quick and easy wealth activated his emotion of greed. He would only experience fear after he had three trading losses in succession and had to enter a fourth trade.
What are fear and greed?
Fear and greed are emotional experiences that occur when triggered. Emotional triggers can be virtually anything - previous negative or positive experiences, beliefs, expectations.
Emotions probably evolved because of the need of humans to survive threats in the environment. The fight or flight concept is probably the result of evolution because it effectively generates actions that result in survival.
You can accept that you are here because your ancestors were fearful and greedy at the right times. They ran when they were going to be eaten and they chased when they wanted to eat. It became so intense and repetitive, that it became part of the DNA of their offspring. Those who ran the slowest or underestimated the threat, died and had no offspring. Those who were not greedy and did not want more, were left with no food during winter and they died with no offspring.
So, those who ran the fastest and those who collected the most, survived and became us!
Humans experience fear in response to a stimulus (a change in the internal or external environment) that creates a perception of risk to body or life.
In trading, a stimulus can be a previous experience of failure such as a failed trade.
FOMO, or fear of missing out, is not a fear by definition in that it does not present danger to body or life, but in trading it can be just as influential. Hesitation, reservation, internal conflict and a lack of confidence, can all be based in fear.
To overcome fear in trading you need to learn the skill of acting without fear. Do what you fear most and you have nothing to fear.
Do the necessary study to understand what underlies fear, so you will know what it is when you experience it. Fear can lead to over-selling, out of proportion to market reality.
Greed is an irresistible urge to possess more, regardless of what is needed or adequate.
In forex and other trading it is often used in a wider sense of wanting to profit.
Greed can lead to a rise in buying, out of proportion to market reality. Understand what greed is.
To overcome the threats posed by greed in your trading, you need to act without greed.
How do you overcome fear and greed in your trading?
- If you think you know what is going to happen in the future, you are making it up, it is in your mind, because there is no way you can know.
- Our minds are wired to think that a recent experience will be repeated in the near future. In trading, as in life, that is not necessarily true.
- Fear and greed are both emotions that can trigger actions which are out of proportion to the seriousness of the threat. That is why fear and greed can trigger market fluctuations out of proportion to reality.
- You have overcome the influence of fear and greed, when you have no conflicting thoughts when putting up a trade. You don't even think about not putting up a trade that meets your requirements (strategy).
- Don't focus on the result, focus on the plan (skills)
- Deviating from your trading plan or strategy is usually an indication that you are succumbing to either fear or greed.
- Be self-aware (know what you emotions are in this the moment) to know what it is that you are experiencing.
How to insulate yourself from the emotions of fear and greed
- If you can accept that you are unable to predict the future, you have made a good start.
- Find your comfort zone where you are at peace with the loss should your trade turn against you. If the potential loss creates tension, reduce your exposure to a level where the tension (fear) disappears.
- If you can't predict (know) the future, what do you know? You know a trade can go either way. You know you could make a loss. You know you could make a profit. That is all you know or can know.
- If you accept that your trading strategy has a statistical level of success, it reduces tension.
- Measure your success over a series of trades before you emotionally react to the outcome. If you accept that your strategy is successful, there is no need to react emotionally to individual trades.
- Keep in mind that charts don't predict the future, they show what has happened and they show a probability for something happening, based on previous, repeatable patterns.
- The opposite of fear and greed is a carefree state of mind, and you reach that by mentally defining the risk out of the trade - Mark Douglas.