Anybody who has ever read an article or attended a course on trading would be familiar with the two emotions of fear and greed.
When most of us entered the world of trading, we considered ourselves "above" these two emotions, and took the approach that "these would only affect other investors, not me".
However, once we make that first trade, both of these emotions kick in. With the commodities markets shooting up to all time highs, we have seen many examples of "greed", as investors and traders scramble to buy as many contracts of oil or wheat or gold as they can afford, regardless of the price.
Recently we have seen Oil push past the much talked about $100 per barrel level. Once this level was taken out, traders rushed in to the market and the prices raced to $111. This was a good example of greed, with the "fundamentals" thrown out the window as traders accumulated oil and talked about it reaching $150 or $200 by the end of the year.
However, whenever we see "greed" enter the market, we invariably see "fear" join the party. As the old saying goes "the market moves up the stairs, but falls down the escalator", and as evident in the below chart this is exactly what happened, with oil losing over 10% of its value and falling back under $100 over the next five trading days.
Greed pushes prices up. Fear brings them down. If we have bought oil, or any other commodity, we will all be tempted by greed to hang on just that little bit longer, in the hope that we can make "just a little bit more".
A good way to combat fear and greed is to have a sound trading plan, with predetermined entry and exit rules. If you have a stop loss order in place, you now know the maximum loss you can incur. If you are not comfortable with this level, you simply don't enter into the trade in the first place. This can go a long way towards eliminating our fear.
Many traders have a protective stop loss order in place, but far less traders will have a "take profit" target in mind when they enter the market. The old adage says to "cut your losses short and let your profits run", but no profit is going to run forever, no matter what your "greed" might be telling you.
We will never eliminate fear and greed, but careful use of stop losses and profit taking orders, as well as a sound trading plan, can stop fear and greed from doing any real damage to our trading accounts, and allow us to concentrate on our main objective - making money.
Good Trading
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