Simple Market Drivers: Fear and Greed
This may sound very complex, but we’ve touched on this a little already. I wanted to mention it again here, to be sure that you do fully understand what we’re talking about. Otherwise, you may as well go get yourself an ISA and watch the TV.
There are many market drivers; by drivers, I mean aspects that effect the markets and cause moves and changing within the price over time. The main market drivers and the ones that even the most experienced of traders tend to forget or even succumb to are, simply;
It’s obvious really. Few, though, comprehend why they are such key things to understand. I won’t go into a massive amount of detail here; needless to say, you should know what causes the market to move and the changes in price and the subsequent patterns that we look for. That’s right, fear and greed.
Fear is probably the stronger of the two drivers. You will find fear in many forms – fear of losing your money is an important one which you face every second you are trading. Other fears include fear of what people or your family will think of you and your trading, and perhaps even fear of succeeding. You have to take steps to overcome your fear, because if you let it control your trading you will be sure to manifest it.
On the other hand, you have to remember that other traders are also driven by fear, and trying to control themselves. This is a useful idea to have in mind when you want to figure out why the market is moving in the way it does, because it usually be-trays the fear effect when the price is falling.
Greed, on the other hand, may seem to be straightforward and obvious. After all, that’s what most people trade for, making money. Why would that be a problem? But if you pursue money against your best judgment, you may well become unstuck again. You may be tempted to hang on too long to a successful trade, in the hope of squeezing a little more out of it, only to see your gains evaporate. You will see the effect of greed on the market particularly when the price is rising. Traders will pile into the move, following the momentum. All too often, the market will see that the share is overvalued and the price will set back.
At the end of the day, the person trading either millions of pounds, or a few thousand, is beset by the same emotions that rule us all. You could say that trading brings out this root behaviour more than any other job or career – except for fear of flying and/or riding a very fast bike, and I know, as I do both. Greed is common and we see it way too much nowadays. Greed is the fuel that drives capitalism and is essentially what drives the western world.