Psychology of trading: how to overcome yourself and achieve success (Part 3)

Fear and greed - are the most dangerous emotions in trading

Greed is an excessive desire for wealth. Although there is nothing wrong with having a lot of money (if you make it honestly), a passionate desire to get rich quick and easy with forex or stocks is likely to bring the opposite effect.

Greed can dull rational thinking and lead to sub-optimal behaviors, such as buying inexplicably large amounts of a financial asset simply because the price is rising quickly.

Example with Tesla stock price chart.

Tesla stock is the most talked about stock on the internet, so the actions of emotional investors can be tried to follow the price and volume chart.

The first arrow shows the rapid growth of the price in high volumes. The media at the end of October was full of bullish headlines:

• The stock was up 20% in one week.
• The company's capitalization rose to $1 trillion.
• Tesla got a big order from Hertz.
• Uber will also use Tesla.
• Analysts have set their target price for TSLA stock at $1300.

Feel the urge to buy the stock when you read the headlines?

The second arrow points to the actions of emotional buyers. Volumes remain high as the news is still being discussed on social media, but growth progress is already noticeably down. All because the stock is being sold by those big players who make decisions not based on emotion.

The third arrow points to a narrow candle on very low volumes - the flow of greedy buyers has been exhausted. And then (as if out of spite!) Elon Musk decided to sell his stock package (in fact, he was getting stock options in return).

Prices plummeted below $1,000, bringing losses to those who bought in late October, driven by a sense of greed, reading the hot headlines.

Tip 1. Study the trading volume indicator. By understanding the psychology of the market and having the skill to read volume, you can develop the skill to understand genuine sentiment so you can then act rationally, not out of a sense of greed fueled by media headlines.

Next, consider the chart of AAPL, another widely discussed stock. It will help us understand another problem traders have: fear. We will show March 2020, when the world was panicking over the spread of the coronavirus.

Note that in the stock market, the rate of decline is always higher than the rate of growth. This can be explained, among other things, by the fact that fear is the strongest emotion. It helped mankind to survive in the wilderness, but in the financial market, fear can be a bad helper.

In times of panic, when emotional traders sell, the most attractive investment opportunities arise.

Tip 2.
Use technical analysis. Using the 1-2-3-4-5-6 anchor points, you could build a channel to then find the perfect entry point to go long at the parallel channel line (7) near the bottom of the panic. By the way, some of the patterns in technical analysis are explained in terms of traders' emotional behavior, so they can help you trade in cold blood whereas others are guided by fear and greed.

Tip 3.
Research the VIX, a financial instrument sometimes referred to as the "fear indicator" of the stock market. The spikes on the VIX chart usually coincide with the lows of the markets.

"Be afraid when everyone around you is greedy, but be greedy when everyone around you is afraid." Warren Buffett.
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Follow our updates for useful information in our series of articles. You can also visit our previous article to better understand this topic.