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The 4 Most Dangerous Emotions For Traders
1. The 4 Most Dangerous Emotions For Traders
There are four psychological states of emotions that drive most individual decision making in any
market in the world. They are greed, fear, hope and regret.
Since the stock market is made http://www.earnforex.com/ up of individual human beings who tend
to act in similar manners, a group is formed. It is only the group's opinion that matters during a
trend, but it is the individual trader's job to identify the subtle clues as to when a market is about to
shift direction.
The clues are there, but they are subtle. An awareness and detailed understanding of these emotions
is what keeps the astute technical trader out of trouble by providing a means to identify individual
weaknesses. We shall now take a closer look at these emotions, and provide examples of how they
influence a trader's ability to consistently make money.
What is Greed?
Greed is commonly defined as an excessive desire for money and wealth.
In trading terminology, it can specifically be defined as the desire for a trade to provide an
immediate and unrealistic amount of profit. When greed sets in, all a trader can focus on is how
much money they have made and how much more they could make by staying in the trade. However,
there is a major fallacy with this type of reasoning. A profit is not realized until a position is closed.
Until then, the swing trader only has a POTENTIAL profit (aka. "paper profit"). Greed also frequently
leads to ignoring sound risk management practices.
What is Fear?
According the most recent results of the poll at the bottom of this hub, "fear" is the emotion that
traders and investors struggle with more than the other three discussed in this article.
Fear is defined as a distressing emotion that is caused by a feeling of impending danger, which
results in a survival response. This holds true regardless of whether the threat is real or imagined.
Fear is probably the most powerful of all human emotions. When traders become afraid, they will
sell a position regardless of the price. Fear leads to panic, and panic leads to poor decision making.
Fear is a survival response. People have been known to jump off of buildings during market panics.
By contrast, no one has ever jumped off of a building because of greed. It took the Dow Jones
Industrial Average from 1983 until 2007 (24 years) to rally from 1,000 to 14,200, but it only took two
years to lose half of its value (2007-2009). That's a dramatic example of the power of fear.
Fear is a good emotion if it gets you out of a bad trade. If, for example, a stock pick hits its
predetermined stop price and the disciplined swing trader exits the trade, then the fear of losing an
excessive amount of money protects the stock trader from financial ruin. However, fear can work
against a trader when they don't enter a quality setup because they have had a series of losing
trades. Just because a trader has lost money in the previous trades does not mean he should be
fearful of entering the next trade. That's why we have trading plans. Trading systems are intended to
take the emotions out of trading. If you're afraid to enter a quality setup, there's no point in even
trading.
2. When the market is in a state of panic or fear, the swing trader should never try to rationalize or ea
builder come up with excuses why they should not get out of their positions. During times of fear
and panic, it is best to go to cash. Listening to the news, the government, stock experts, or other
trader's opinions is a waste of time. If the market (aka. "the group") is in a state of panic, it is best to
not fight the trend. The group will always win. You don't have enough money to hold the market up
by yourself. It's pretty simple...when institutional traders (banks, mutual funds, and hedge funds)
decide to dump their positions, the market will fall (and vice versa). When there is fear, steer clear!
When in doubt, get out! Truly understanding the power of fear is one of the key pieces of the puzzle
to improving your online trading education.
What is Hope?
Hope is a feeling of expectation and desire for a certain thing to happen. It's an individual's desire to
want or wish for a desired event to happen.
Hope may be the most dangerous of all human emotions when it comes to trading. Hope is what
keeps a trader in a losing trade after it has hit the stop. Greed and hope are what often prevent a
trader from taking profits on a winning trade. When a stock is going up, traders will often remain in
the trade in the "hope" of recouping past losses. Every swing trader hopes that a losing trade will
somehow become a winning trade, but stock markets are not a charity. This type of thinking is
dangerous because the group (stock market) could not care less about what you hope for, or what is
in your best interest. Rest assured, when your thinking slips into hope mode, the market will punish
you by taking your money.
What is Regret?
Regret is defined as a feeling of sadness or disappointment over something that has happened or
been done, especially when it involves a loss or a missed opportunity.
The negative implications of this emotion are obvious. It is only natural for a stock trader to regret
taking on a losing trade or missing a winning trade. But what is important as a trader is not to hyper
focus on losing trades or missed opportunities. If you lose money on a trade, then you should simply
evaluate what went wrong and move forward. Other than the lessons that can be gained from
evaluating each trade, there is no point to spending further time regretting the decision to enter the
trade. It is also human nature to feel regret when an opportunity is missed. If you miss a winning
trade, then you must move on to the next potential trading opportunity.
When technical traders allow regret to rule their
thinking, they tend to "chase trades" in the hopes
of still being able to make money on the position
by entering it well above the trigger price. The
problem with this thinking is that the reward/risk
of the trade no longer meets the parameters of
good trade management. For instance, by
entering a trade 1 point higher than the trigger, the potential reward may be 1 point, but the
potential loss may also be 1 point. This sets the reward/risk ratio at 1 to 1. Recall that we prefer
trades to have at least a 2 to 1 reward/risk ratio. However, if the trade had been entered at the
appropriate trigger price, the reward/risk ratio would have been 2 to 1. Successful and profitable
online traders ea builder learn to discipline their mind to eliminate regretful thinking.