Fear and greed are often recognized as two key drivers of financial markets. While this is undoubtedly an oversimplification, fear and greed play a vital role in the psychology of trading. Learning when to embrace and control these emotions is the only thing that draws a line between a successful trading career and a short-lived trading career.
Given this, you would want to learn about how to manage fear and greed in the stock market.
Read on to learn more about fear and greed in the investment world, including when these emotions are likely to surface and how best to manage them.
But before we hop onto managing fear and greed in trading, let’s understand what these emotions are.
In general terms, fear is an emotion associated with the fight-or-flight instinct that lives in every one of us. When it comes to investing, fear can be classified into two types:
While the fear of losing wealth is quite natural and important, the second attribute of fear due to an underperforming market is tough to overcome. It takes persistent hard work to master this second type of fear; in fact, it may take years to overcome this emotion.
But, who cares what others are doing?
Ever wondered why Warren Buffett lives in Omaha instead of New York City? In the past, he revealed several times that he wants to be as far away from the “noise” as possible to think and come up with his thoughts, rather than getting influenced by others.
Greed, in usual terms, is defined as the intense and selfish lust for something. Just like fear, greed in the investment world can also be categorized into two types:
Compared to fear, greed is relatively an easy emotion to understand. Moreover, greed in a controlled weight is good since it propels us as a species to do better. It drives us to achieve great things by desiring more.
Even though the emotion of greed is not as strong as fear, it can still make people act in ways they shouldn’t. This calls for a plan to manage greed.
Having a definite plan while trading in stocks ensures that you stay on track and avoid any emotional impulse that may deviate from the plan. In particular, the right plan can stop you from emotion-induced:
One myth flowing around the stock market for ages is that you can get rich overnight. However, the fact is that the stock market is a great place to grow your wealth but, in the long run, only. The market does offer better returns than any other investment option, but that takes time. So, if you wish to see your money grow multifold, abide by patience and let your investment grow. Follow your plan, and don’t give in to any impulse of fear or greed.
As a stock market investor, you need to be accountable to yourself while investing. You should keep constant track of your investment. With that track, you should be able to assess all your investments and see whether they align with your planned goals or not. Having a trading journal of your investment can help you make analytical decisions while putting your emotions down. Further, it also gives you the ability to rebalance your investment portfolio as and when required.
Nobody is at the pinnacle of knowledge when it comes to the stock market, not even Warren Buffet. As an investor, you should always be open to learning, learn about the market’s fundamentals, read about how the market functions, and understand all technical aspects. Most importantly, analysing what others are doing; their deeds could be a great source of knowledge. When you learn, you always go for analytical decisions and not for emotional impulses.
Mastering one’s emotion while investing is a hearty challenge. However, the top investors have done it, either through introspection or by adopting the best methods to trade. No matter what way you adopt, the only thing that matters is not letting your fear and greed overpower your analytical decision-making. So, start taming your emotions now and get the best out of your investments.