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Day Trading - Fear and Greed

Fear and Greed are two of the emotions that day traders and investors know best.

You have often heard that these are the emotions that drive the market. The Greed of missing out on the market going higher causes people to buy in at the top of a run thus keeping it going higher and higher until there are no more fools to buy.

The fear of the pain of losing causes people to cut their losses and sell at the bottom thus causing the drop to continue to drop. The pundits explain this on CNBC on a regular basis.

This is the driving force behind the market cycles. If the market was 100% efficient and companies were valued at their fair value then there would be no traders and we would all be investors enjoying the returns of an expanding or receding economy. The professional trader takes advantage of this and capitalizes on the emotions of others.

So how do we become that professional trader when we have these strong emotions of Fear and Greed pulling at us every day?

Most of us were drawn into this field due to the lure of easy money. We bought stocks and they went up. Any fool could do this and we knew we were smarter then most.

So after reading a book and checking out a few websites you're ready. With real time charts and an execution system where you can buy on the Bid and sell on the Ask, just like the professionals, nothing could stop you! After a little paper trading you are rich. Ready to live the life of your wildest dreams.

Things go along well for awhile. You expect to lose a little as that is part of the learning curve, and you did. Then the perfect setup happens. It meets all your criteria. Back up the dump truck. Buy, Buy, Buy! You are going to make a killing!

Then the trade turns against you.

“Well, I have to give it a little room to work out…” you tell yourself. And the stock keeps dropping.

“If you liked it at the first price then you have got to love it now. Buy more.”

Yet it keeps dropping. Now the pain is mounting. Each day it gets worse. But others on the message boards were hanging in and so could you.

At some point, maybe after a few sleepless nights, or after your significant other berates you for losing 'their' money, the pain becomes too much and you get out, asking yourself “How could I have been so stupid?“

The rule “Never let this happen again” is now firmly in place. From this point forward the “never” fear is locked in. Once a trade starts to go against you the “never” fear raises its' head ever so slightly. You start to feel uncomfortable, pressured. You begin the deep descent down into the morass of doubt, “Maybe it wasn't such a good setup after all?” or “Better get out while I can.”

When a trade goes in your favor there is that great feeling of being right. Yes, it worked! I was right. Then the pressure that it could turn against you starts to build, and with it comes the litany of “Better get out while you can”, or “You can't go broke taking profits.” The pleasure of winning is never as strong as the pain of losing. Now, at best, your judgement is clouded so you are no longer able to see the trade objectively. It is filtered through your emotions.

If this continues it is just a matter of time until you stop trading and move on. It's happened to thousands of people in one form or another. And yet professionals keep taking in money day after day!

At Trading From Main Street we, as professionals, are well aware of this problem, we address it on a regular basis. We use such tools as the Trader's Circle , a member's forum solely dedicated to the Psychology of Trading.