Psychology & Risk: POST 3
Right, we’ve covered brain biases [Understanding Cognitive Biases] and the need for iron-clad discipline [Mastering Trading Discipline]. Now for the main event: Emotions. Let’s talk about the two biggies that haunt every trader’s nightmares: Fear and Greed.
If you’ve placed even a few trades, you know the feeling. Stomach drops when a trade goes red? That’s fear. Feel an almost uncontrollable urge to jump on a stock that’s already halfway to the moon? Hello, Greed (or its sneaky cousin, FOMO – Fear Of Missing Out). These feelings are 100% normal human reactions. The problem starts when you let them grab the steering wheel of your trading account.
Fear: The Silent Account Killer
Fear messes with you in subtle but deadly ways:
- Analysis Paralysis (Fear of Pulling the Trigger): Your setup looks perfect, checks all the boxes on your plan, but… you freeze. “What if it fails?” “What if I lose?” You hesitate, the entry passes, and then you watch, frustrated, as the trade works without you. Sound familiar?
- Stop Loss Shenanigans (Fear of Losing): This fear can make you set your stops ridiculously tight, getting nicked out by normal market wiggles, only to see it rip in your direction afterward. OR, even worse, it makes you move your stop further away mid-trade because you can’t stand the thought of taking the loss, turning a small, planned risk into a potential disaster.
- Profit Snatching (Fear of Giving Back Gains): You’re up! Nice! But oh god, what if it reverses?! Fear screams, “Take the money and run!” So you grab a tiny profit, violating your plan and leaving potentially huge gains on the table. [Beginner’s Guide: Risk/Reward Ratio]
Greed: The Reckless Gambler
Greed is fear’s destructive twin, pushing you into stupid risks:
- FOMO Chasing: That stock is flying! Gotta get in! You jump in late, near the top, with zero plan other than blind hope. Usually ends badly.
- Over-Trading Frenzy: Just had a nice win? Feeling good? Greed whispers, “You’re hot! Let’s do it again!” Suddenly, you start seeing “setups” everywhere, forcing trades that barely meet your criteria (or don’t meet them at all).
- Revenge Trading Rampage: Took a loss? Greed’s angry side takes over. “Gotta make that money back NOW!” You jump into the next thing you see, probably trading bigger and angrier, completely off-plan. This is how accounts get blown up, fast.
- Ignoring the Exit Sign: Your plan clearly says, “Take profit here.” But Greed whispers, “Nah, this baby’s going higher!” You hold on, ignoring your rules, only to watch it tumble back down, sometimes even turning a winner into a loser.
How to Wrestle These Beasts into Submission
Look, you can’t just switch off fear and greed. But you absolutely can learn to manage them so they don’t dictate your trades. Here’s the game plan:
- Name It to Tame It: First step? Recognize the feeling. “Okay, heart’s pounding, palms are sweaty… that’s fear.” Or, “Whoa, feeling that intense urge to chase… classic FOMO.” Just acknowledging the emotion takes away some of its power. Don’t beat yourself up for feeling it – you’re human!
- Your Plan is Your Anchor: When emotions are swirling, grab onto your trading plan like a life raft. Force yourself to ask: “What do my rules say right now? Does this feeling match my objective criteria, or is it just my brain freaking out?” [Beginner’s Guide: Building Your First Trading Plan]
- Know Your Max Pain BEFORE You Enter: Decide exactly how much you’re willing to lose on this trade (your stop loss) and make sure your position size fits your risk rules (% of capital) before you even think about clicking that button. Knowing your worst-case scenario upfront makes it way easier to handle dips without panicking. [Beginner’s Guide: Stop-Loss Orders] & [Beginner’s Guide: Position Sizing]
- Use Real Stop Losses (Not “Mental” Ones): Especially when you’re learning, put the actual stop-loss order into your broker’s system. Don’t trust yourself to click “sell” when the pressure’s on and fear is screaming. Let the technology enforce your discipline.
- Take a Breath, Check Yourself: Before trading, and during tense moments, take a few slow, deep breaths. Ask yourself: “Am I calm? Am I objective?” If the answer’s no, step away for 5 minutes. Seriously. Reset.
- Confess in Your Journal: Write down how you felt! “Felt intense FOMO on that TSLA spike, almost chased it.” “Panicked and exited AAPL early when it dipped, even though it hadn’t hit my stop.” Seeing these patterns written down is eye-opening. [Link to Post 8: Performance Journaling for Psychological Insight]
- Shift Your Goal: Execute Flawlessly, Not Just Make Money: Aim to follow your plan perfectly on this trade. That’s your job. Profitability comes from doing that consistently over many trades. Obsessing over the P&L of every single trade just cranks up the emotional volume.
Dealing with fear and greed isn’t a one-time fix; it’s a constant practice of self-awareness and relying on your logic (your plan!) when your emotions try to run wild. It’s tough, maybe the toughest part of trading, but getting this right? That’s where the real edge is.
- What’s Next? Okay, so you’re going to have losing trades. It’s guaranteed. How you handle the feeling of losing is critical. Let’s talk about that. Read the next post.
