TRADING PSYCHOLOGY
It's All About Balance
Trader Equilibrium
by Ruth Roosevelt
To handle the volatility in the markets, you must maintain balance within yourself.
Like life itself, trading is about balance. The markets are in constant motion, and in order to handle the volatile forces appropriately, you need to have equilibrium within yourself. This balance will enable you to be on an even keel as you handle any situation. With equilibrium, your emotional inclinations are equalized and stabilized over time.
FEAR AND GREED
As a trader, it is important for you to balance your fear with your greed, and vice versa. Fear and greed are so prevalent in trading that they have become the default clichés used to simplify and represent the entire complex trading experience.
Fear must be balanced. If you have too much fear you can't trade, at least not with clarity and consistency. On the other hand, if you have too little fear, you become reckless. In a similar way, greed also needs to be balanced. If you have too much greed you're likely to grossly overtrade. You may ignore warning signals in your indicators and run the risk of blowing out in a random event. But with no degree of greed at all, you may not even bother to trade, or trade in sufficient size to make a difference.
Fear and greed should act as counterbalances. However, most of the time one of them outweighs the other, and this puts a trader off-center. Even so, fear and greed are not opposites. The opposite of fear is overconfidence, which can be even more dangerous than greed because you can easily get sloppy or reckless. The opposite of greed is either contentment or self-denial. If you do not think you deserve profits, you won't get them, and if you are content, there is no reason to put your capital at risk -- and you stagnate.
Like other emotions, fear has various degrees:
FEAR Indifference -> Concern -> Caution -> Anxiety -> Fear -> Panic -> TerrorBy moderating your fear, you can trade with caution. You cannot effectively trade when your emotions are at the extremes of fear.
Greed, too, moves along a continuum:
GREED Disinterest -> Desire -> Focused wanting -> Grasping -> Greed -> Rapacity -> Desperate longingYou need at least a small portion of greed, but you must modify it into a healthy desire. With a healthy desire and effective caution neutralizing and guiding your emotions, you will be able to trade with poise and stability even in the most tumultuous circumstances. ...Continued in the June issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the June 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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