Stock Psychology: Emotions Fear & Greed
Greed
Most investors are not satisfied with 20 % - 40 % profit annually, what they want is double or triple their stock trading account equity.
With right investment strategy, the stocks market can certainly be very profitable but greed is always a factor in any human endeavor, especially in investing. Greed in Stocks leads to over trading. When an investor falls into this trap, there is a greater potential to risk too much. Greed can cloud your judgment quicker than anything else. This is where self-discipline can help you maintain your focus and your profits, to maintain discipline investors require to use the right psychology principles.
Stock psychology - teaches you how to fight your greed and set realistic goals. Greed is what makes most investors to lose. Profit is never enough. Everyone wants to earn more money. Well, some traders do succeed once or twice. That is called good luck. But short term profits mean nothing. If you focus on good risk management in the long term you will keep winning.
A good principle is, not to use more than 5% of the margin, & not to risk more than 2% on any one single transaction.
Fear
Fear is another emotion in psychology that affects the stocks markets. Poor trading practices, such as taking on too much risk with excessive number of transactions can magnify the normal stresses of the stocks market place. The best way to combat fear is to learn and understand how emotions affect the stocks markets & learn how to avoid these emotions when trading the stock market.
Identifying long term trends can improve trading results, spotting these trends can help you plan the best investment strategy so that you can maximize profits, while at same time keeping the emotion of fear at bay.
Sometimes, however, psychology problems have nothing to do with your stock strategy. They are the results of pre-existing problems that will not be solved by different strategies & techniques. Your biggest enemy when trading is you. It is not the stocks market or the brokers. It is you! If you do not have a professional stock trading mindset then you will make the wrong decisions & lose money on a consistent basis.
Stock psychology teaches courage. In Stocks it takes a lot of courage, patience and experience to make huge profits.
Hope
Hope can cause investors to make mistakes when it comes to investment decisions, especially when it comes to staying with a losing position for too long. Exit points exist for a reason and losses should be kept to a minimum.
The market may be driven by emotions but it can also be predicted: because it has ALWAYS been driven by the same basic human emotions.
Stock psychology - is based upon how well you know yourself to be able to profit from your strong points, as well as control you weak ones, it has a lot to do with how successful you will be when it comes to investing. When you truly know yourself, then you are aware of how you are going to react under certain circumstances and you can protect yourself from self-damaging actions or decisions when it comes to managing a transaction.
The right mindset can be a tool that can help an investor control and predict their emotions so that they are able to make correct decisions based on facts. The lack of this psychology can be a hindrance to success since the movements of the stock prices are pretty unpredictable.
The right psychological outlook can help investors face the issues & make sound decisions in the end. There should be a balance among all the different aspects of trading that determine whether an investor will be successful when transacting.
System Mindset
This is a part of the Stock Trading Plan about mindset
MINDSET/PSYCHOLOGY
- Invest without Emotions (greed, fear, anticipation, impulse, bias, over-excitement)
- I trade what my eyes see not what I feel.
- I will be patient.
My job isn't to be the trade system!
It isn't to decide which signals looks promising.
That is the job of my stocks trading system. My system has a set of rules which tells me this is what I follow. Do not get caught up in stocks price action and make rules as you go along.
MY JOB DESCRIPTION IS
To sit patiently & wait for my system to indicate that it's time to enter or it is time to exit. And then with great focus I execute my strategy as planned.
Taking trades not indicated by trading system, second guessing trading system and not taking those given, hesitating & getting in late, anticipating and getting in early are all common place & boil down to lack of faith in system and not having a burning focus on accurate execution.
GOAL: To have 100% undivided focus on mastering my ability to execute my system accurately.
More you develop the ability to step back from stocks price movement & watch the stocks market dispassionately, waiting for a signal, the easier it will be to witness the fluctuations of your emotions without getting sucked into them & allowing them to throw you off your game.
WEAKNESS
- I am greedy.
- I over-trade
- Make a list of all your weaknesses that are interfering with your stock trading strategy. This is first step to help you overcome these weaknesses. Use psychology to help you overcome them.
NB: by writing down your weaknesses you will start recognizing them as you progress, once you do this you will begin to avoid this mistakes and your results & profit will improve.
To learn how to write these guidelines on your Stock plan, read the Stock plan tutorial at the key concepts tutorial section.
