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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

How to manage fear and greed in trading

Find out how to handle fear and greed to make trading financial markets more emotionally manageable.

Reading time: 4 minutes

Trading level: Beginner


How to manage fear and greed in trading Source: Shutterstock

Managing fear and greed while trading

  • Fear and greed are two drivers that influence our everyday lives
  • These influences carry over to trading and can be detrimental
  • Traders can remove these drivers by looking at the big picture and planning ahead

Fear and greed are often identified as the main drivers of financial markets. This is clearly an oversimplification, however fear and greed do play an important role in the psychology of trading. Understanding when to embrace or tame these emotions could prove to be the difference between a successful trade and a short-lived trading career.

Keep reading to learn more about fear and greed in trading, including when these emotions are likely to surface and how best to manage them.

The truth about fear and greed while trading

‘Fear and greed’ can be commonplace among traders and can be rather damaging if not managed properly. Fear is often observed as the reluctance to enter a trade or the closing of a winning trade prematurely. Greed on the other hand manifests when traders add more capital to winning trades or over-leverage with the aim to profit from small moves in the market.

There are numerous traces of the origins of these two drivers, but when analysed logically greed and fear both stem from the innate human instinct of survival.

What is fear?

We know that fear is related to the fight-or-flight instinct that exists in each and every one of us. It is what we feel when we recognize a threat. Traders experience fear when positions move against them as this poses a threat to the trading account.

Watching a position move against you invokes the fear of realizing that loss and so traders tend to hold on to losing positions for much longer than they should. In fact, this was discovered as the number one mistake traders make when DailyFX researched over 30 million live trades to unearth the Traits of Successful Traders.

A second scenario where fear tends to get the better of traders is right before entering the market. Despite the analysis pointing towards a strong entry, traders may find themselves bogged down by the fear of loss and end up walking away from a well thought out trade.

Fear is often present when markets have crashed and traders are reluctant to buy at the bottom. In this scenario traders often decide not to enter a trade out of fear that the market will drop further and miss out on the rise higher.

What is greed?

Greed is very different to fear but can easily land traders in as much hardship if not managed appropriately. It tends to arise when a trader decides to take advantage of a winning trade by devoting more money to the same trade, in the hope that the market will continue to move in the trader’s favour.

Greed can also surface when traders experience a losing trade and decide to ‘double down’, in the hope that throwing more money at the problem will help the position turn positive. From a risk management point of view this is very risky if the market continues to move against the trader and can quickly turn into a margin call.

Greed has appeared many times in the financial markets. one such time was during the dot-com bubble where individuals bought more and more internet stocks and inflated their value tremendously before it all came crashing down. A more recent example is bitcoin; investors piled into the cryptocurrency thinking it could only increase in value before it too came crashing down.

How to mange greed and fear to be a successful trader

There are several ways to take control of your emotions and make sure fear and greed do not influence your trading decisions or overall success.

Have a trading plan

Traders should have a trading plan in place to avoid any emotional impulses that deviate from the plan. Some examples of this include: overleveraging, removing stops on losing positions, doubling down on losing positions.

Lower trade sizes

“One of the easiest ways to decrease the emotional effect of your trades is to lower your trade size” – James Stanley, DailyFX Currency Strategist

This was one of the many good points made in our article focusing on managing the emotions of trading.

Furthermore, the article continues to state that placing a large trade on a demo account will not result in any lost sleep, as there is no actual financial risk. However, traders will most certainly experience stress after witnessing price swings on a large live trade. Such stress has the potential to lead to bad decisions which may impact the trading account negatively, so it is crucial to keep these in check.

Keep a trading journal

Traders also need to be accountable to themselves when trading. The best way to do this is to create a trading journal. Trading journals assist traders to record their trades and make note of what is working and rectify strategies that aren’t. It's important to remove all emotion when evaluating the results of your trades and cut unsuccessful strategies.

Read our guide to keeping a trading journal.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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