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Home » Business And Finance Articles » Greed And Fear

Greed and Fear?

We have heard it: the market is not driven by money but by greed and fear. The two biggest emotions that move markets up and down at random; they seem to fluctuate without any logic behind them.

Why do we get these emotions when we trade? After all, it's stocks we're trading, not playing sports where our bodies are physically working to exert energy and sweat. So why then does it take to so much emotion just to click a buy button and a sell button and watch the screen with numbers moving back and forth?

When it comes to money, it's the master of us all. It doesn't matter what walk of life we hold, we are taught that money is the only way to reflect us as successful and accomplished people. But in the end, does it come down to money to become successful in trading?

The answer is no. Why? Success comes from loving what you do, not from doing what you're doing for the sake of money. There are people who work at jobs they don't like. Many do it just to get by but do not have the drive to excel. People who love their jobs have higher probability to excel in their work because they don't see it as work but something they love to do. Many of us enter the market to make money, not lured by the challenge of figuring out how the market works. It is the reason why new investors and traders start by placing a large position thinking the trade in monetary value, profit or loss. They think will be quick and easy, not really giving thought on how to figure out this complex but interesting market first before committing money in there. By committing money, its about the money, not the pleasure of learning about the markets.

This is where fear and greed comes in. This very first thought people make when entering is 'how much can I make?' and not 'I wonder how this market works?' There is a big difference in this mindset. When we don't worry about the money, we can view things in a more objective way. Believe it or not, there is a fine line from being in a trade and out of a trade, especially holding a big position. The emotions overtake judgment very quickly when a major loss is on the line with the prices fluctuating rapidly.

So how do deal with this? There are several things we can do keep greed and fear out of the trading plan:

1. Start trading smallest positions possible -The idea is to learn, improve and perfect trading while not thinking about the importance of gains or losses. This should subdue if not remove the fear and the greed.

2. Use stop loss order - Believe it or not, stop loss orders bring comfort and peace of mind that would otherwise bring many traders sleepless nights. Why? Not knowing how much the loss is, which can be unlimited, carry a major concern. This method will get rid of the fear factor.

3. Create a trading plan - Having a plan of attack, where to get in and where to get out in a certain market condition relieves the trader from having to think on his feet; without a plan will cause the trader to freeze and be indecisive and in turn cause more emotional stress.

4. Set target price - This may help in deciding before the trade when to take profits, not leaving to decide when to exit. Target profits helps against greedy feelings on thinking that the profits will continue to rise. When it doesn't and profits turning into losses, the tendency is to freeze and not take action. Having profit targets also help prevent the taking profits too early. This is also a fear stemming from being afraid the profits will disappear and turn into a loss.

This is the worst aspect of the trading: lack of self-control. Trading gives total freedom on deciding when and where to buy and sell but this is also why freedom becomes a hindrance. Discipline is the only method to alleviate fear and greed. Without it, it will set the tone a fear of losing everything and greed will prevent from taking profits when it's right the time to do so.

And here is another random article you might be interested in...

Why Bosses Don't Get All the News

Not long ago, a friend who works in television complained that the industry has no interest in real business stories. And, I had to agree with him, since we don't see much coverage that doesn't involve stock prices or some sort of scandal.

But, there has been one important exception. A few years ago, the British Broadcasting Corporation (BBC) began airing a business show that became as popular as some of its regular prime-time fare (American and Canadian television networks followed up with their own versions of the program).

Fast Company magazine told us about the BBC program, which sees CEOs leaving their corner offices for a stint on the front lines. And, as they work on the front lines, the cameras are rolling.

For many, if not all CEOs who participated, the experience was a great eye-opener. According to the magazine, "Almost without exception, CEOs learn a lesson in communication. 'We find people at the heart of every organization who know exactly what's right and what's wrong with it,' says [Robert] Thirkell [who produces the show]. 'But between them and the bosses is a layer of people -- those whose careers depend on sanitizing that information. Bosses are always surprised at how much knowledge exists further down the ladder.'"

With that in mind, let's spend a minute or two thinking about the barriers to good upward communication. But, rather than blame middle management, which seems to be one of the themes of the program, we'll look at structural issues.

First, upward communication involves the aggregation of information or data. For example, a supervisor reports on the collective efforts of five front-line staff, a manager aggregates the data of five supervisors, and a vice-president aggregates the information provided by five managers.

As the information gets aggregated this way, it loses most of its context and richness. By richness, I'm talking about the anecdotal and personal knowledge that front-line workers gather and build from continuous interactions with customers or users. Obviously, most CEOs don't have time to read reports comprised of hundreds of anecdotes; they want summaries of the information.

Second, as information or data moves upward, it tends to be slotted into pre-existing categories. Employees on the front-lines know and understand the nuances of each customer story; it reflects, to a greater or lesser extent, the personal relationship between worker and customer. But, there's no place for nuance in weekly reports.

Third, upward communication normally deals with compliance, rather than competitive or operational intelligence. Managers use information moving up the hierarchy to determine how well instructions have been followed. When they want competitive or operational information they often use different means, such as bringing in consultants or commissioning studies.

It's always tempting to attribute communication failures to moral failures by managers, but if you really want to understand communication failures, you should start by looking for structural hurdles.

In summary, CEOs who spend time on the front lines will undoubtedly be in for many surprises. But, if they want to get the news from the front lines, they'll need to address the structural nature of upward communication.