Candlestick Trading Blog

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Greed and fear management are two of the most important factors in your stock market investing education. These two emotions have an overwhelming power over almost all stock market participants, including institutional managers, stockbrokers, investors, traders and yourself.

Your capacity to resist greed and fear in your trading may not be as resolute as you think. However, it's nothing to be ashamed of and affects the entire stock market community. You should admit that these emotions exist and address them directly in order to make money investing in stocks.

How does greed and fear manifest themselves in your stock market strategies?

Here's an example. You have been watching a particular stock for some time now. It finally set itself up perfectly for your purposes, so you decide to enter the position. You have bought it at the best possible price and it starts moving higher just as you predicted.

At a certain point, greed instantly steps in and convinces you that the stock will explode to higher levels in the very near term, so you buy more shares. Or, the stock moves up just a little above your predetermined target and you feel that it still has room to go even higher. You decide to hang on to this baby because it will surely go higher tomorrow. When this happens, it isn't just you that sees what's going on. Greed causes all the cumulative market participants, who are also looking for hot stock market picks, to also join in for the ride.

A stock price usually falls faster than it goes up. When this happens, fear takes over and the stock plummets.

In the example above, you could have gotten out when the stock reached your preset target. However, you held on because greed was at your side. The next morning the stock price gaps down and sells off all morning. Greed is telling you to hang in there and the stock will come back. Unfortunately for you, the stock continues to go down, down, down. You start to feel sick. How could this have happened? Fear is now at your side, but by now it's too late. Your potential profit has turned into a loss.

Everyone goes through this until they have mastered the ugly faces of greed and fear. Harnessing the emotions of greed and fear will put you well on your way to becoming a successful stock trader.