Why Understanding Fear is Crucial: A Trader’s Perspective

Greed and fear can be hard to balance and recognize, especially if you are trying to inform your decisions based on your fear or greed. While greed can be useful in small doses, it can also lead to irresponsible, irrational decisions that may cause you to lose money. Like greed, understanding fear as it relates to the stock market is incredibly important.

Fear is, essentially, the opposite end of the spectrum ranging from extreme greed to extreme fear. The understanding of these characteristics of the stock market or, to be more specific, stock market investors, can be incredibly useful to current or potential investors.  This scale is released each day by CNN and considers the following seven factors: stock price breadth, market momentum, junk bond demand, safe-haven demand, stock price strength, market volatility, and put and call options.  

Since greed and fear are opposites, too much of either can be detrimental to an investment portfolio. Too much greed can lead to irresponsible investments, while too much fear prevents people from taking risks needed to see a payout from their investment. Fear in its most extreme form would involve not investing at all, instead just letting your money sit in your bank account. You would never lose money, but you would also never make anything that a stock market investor could make.  

But an understanding of fear is crucial to invest successfully.  Knowing the best times to buy, along with the best times to hang on to current investments or even sell those investments, is of utmost importance to investors. People with incredibly successful portfolios are likely those who can understand and recognize their greed and fear. Being able to recognize when the emotions of individuals may be deceiving them based on hard numbers is a valuable skill for any stock market investor.  

Out of all the actions resulting from an abundance of fear, the most common is abandoning a stock too quickly before it has time to yield a profit. This happens a lot with people who are too inexperienced to know that you need to hold onto a stock for a longer time before it will start paying itself off. It is also essential to understand that investing when fear is slightly higher than usual is the way to go. Stock prices tend to dip as fear gradually increases, and, if you are confident prices will rebound despite the increase in fear by shown by the majority of investors, you can cash out big time.  People tend to sell investments as fear increases, driving prices down. All you have to do is recognize that this is what is happening, evaluate whether that fear is warranted, and act accordingly.   

Risk Disclosure- Trading financial instruments such as but not limited to off-exchange foreign currencies, cryptocurrency (cryptocurrencies), Futures, ETFs, Equities and Indexes contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
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Ingenious Forex Trading: Why Understanding Fear is Crucial: A Trader’s Perspective
Why Understanding Fear is Crucial: A Trader’s Perspective
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