Investment and trading in the stock market require continuous learning and discipline. There are times when you have to be patient and hold on to your investments, and there are times when the best trading strategy is to minimise your losses by selling. At any of these times, relying on emotions can do you no good.
Successful share market traders recognise this truth and learn to manage their fear and greed while investing. But why is it important to acknowledge these emotions and why should you be careful as you learn stock market trading?
Role of fear in trading
Fear is an essential emotion that guides our survival instinct. In stock trading, fear guides bearish actions and drives traders to sell their holdings if they anticipate losses or a market crash. While it is good to safeguard your investments against future losses, uncontrolled fear could cause you to panic and base your actions on rumours or market fluctuations.
Fear is what tends to drive bear runs on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and Nifty. As few traders following a swing trading strategy start selling, the indexes drop. This creates a wave of fear among other traders and causes them to sell too, worsening the bear run.
Role of greed in trading
Similarly, greed is what fuels bull runs in the share market. As a powerful emotion that drives you to build as much wealth as possible, it can also cloud your judgment and make you buy when you should be selling. Traders acting on greed can choose to remove stop-losses during intra-day trading or over-leverage themselves.
Sometimes such moves can prove to be beneficial, but most of the time such emotional decision-making exposes traders to higher risk and huge losses.
Thus, as you learn how to trade, you must also learn how to control fear and greed in trading. Here are some smart tips to help you do just that –
- Create a plan and stick to it: Having an investment plan in place could save you from making emotional decisions. Define your daily, weekly, monthly, and annual financial goals and let them guide your investing decisions.
- Invest with a long-term approach: To avoid getting affected by fear and greed, you need to adjust your investment approach. Before selling out of fear, ask yourself if this move suits your long-term investment goals. Similarly, before buying out of greed, pause and check if the trade matches your long-term financial goals.
- Track your investments: To stick to your plan and investing approach, you need to track your investments and ensure they are a result of fear and greed. Try keeping an investment journal with a detailed record of every trade. Analyse this journal regularly to correct emotional trades and build a sustainable portfolio.
Always choose research over rumours: Rumours and misinformation are the biggest cause of fear and greed in the share market. Instead of paying attention to those, trust your research and experience. Keep learning about the stock market and apply your analysis to trade, instead of your emotions