Role of fear and greed in trading

Role of fear and greed in trading
Highlights

Fear and greed are like two sides of a coin in the stock market.

Fear and greed are like two sides of a coin in the stock market. Whenever there is a change in the trend of the market, be it up-side or down, there is a turmoil of emotions going on in the mind of the trader also. Fear and greed are dominant part of every trade.

Sometimes in a downtrend when a stock falls to low-level the trader is willing to buy out of greed because it is cheap, and he fears that tomorrow it may not be available at the same price. Both are important pre-requisites for trade.

In our daily life also, we often observe that there is a 50 per cent discount on sales but the sale lasts only for five days. This discount is the greed factor and the five days' time period is the fear factor.

A greedy trader is confident of the upward movement of price. When greed dominates, the probability of increase in the price of the stock is high. When fear dominates the trader feels the price will come down.

Suppose a person has bought a stock at Rs 100 and if his target is around Rs 150 in a time horizon of one year, but if the stock rises to this level within three months, then instead of exiting from the stock he should hold it for some more time.

The increase in price is suggestive of the right stock selection and ensures more profits. So, it is better not to be greedy in this trade.

Instead a smart trader would actually invest more after there is a correction in this particular trade and he can keep on adding additional units to increase his profits in future.

Another side of the above trade is -- what if the price comes down to Rs 100. This fear is also good, and the probability also should be considered. But if the stock is in the middle of a trend then there is nothing to worry.

The trader can cling onto the stock as long as it is in a particular trend. At the point of trend reversal, he can think of exiting from the stock.

Another ideal trading strategy is when the market rises it is always better to book partial profit.

Exit from part of the stock and retain another part of the stock. This is an ideal way of booking profit and minimising risk. A fine balance between fear and greed is the key to the success of every trade.

(The author is a homemaker who dabbles in stock market investments in free time)

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