Maintaining discipline to counteract fear and greed in trading

USING wise judgement as a broker in monetary business sectors depends vigorously on the accessibility and openness of information, largely because decisions are heavily influenced by historical trends, market performance data, as well as metrics such as liquidity, volatility, and volume.

There is, however, a psychological dimension to trading. Being able to make speedy choices, practice discipline and manage feelings are a portion of the elements that add to traders having the resilience they need to achieve long-term success.

The last 10 years have seen the multiplication of online platforms, which have cut out the middleman and opened the trade of financial instruments to the ordinary citizens.

The trend has launched the appearance of a worldwide community of retail traders who now have access to trading for their own personal gain. But while greater inclusivity and the democratisation of the investment world certainly have real, tangible benefits, there are also several hurdles to overcome.

One of the main obstacles is that, unlike experienced professionals who are skilled at overcoming psychological roadblocks like unconscious bias and impulsive decision-making, new and inexperienced traders are significantly more vulnerable to these emotional pitfalls.

Kamogelo Mosime, manager at trading company Tickmill, gives us insight on how to maintain discipline to counteract fear and greed in the existing market environment.

Understanding the offsetting effects of fear is first on Mosime’s agenda. “Traders who are driven to succeed need to master the art of facing fear. Unexpected market shocks and fluctuations that lead to sudden financial losses can cause traders to make rash decisions and dampen their appetite for risk.

“Factors such as these are behind some of history’s greatest examples of investors hastening to sell their shares at a loss in order to remain liquid and sidestep the potential for financial devastation,” Mosime said.

A valuable skill is the ability to conquer fear and overcome it by ‘’holding down the fort’’ and sticking to your goals. This can be done in a number of practical ways. To control their emotions, some traders use a trading plan.

Mosime said the trading plan outlined the traders' main motivations for participating in the market, the goals they wished to achieve and in which time periods, their risk-reward ratios and limits on the capital they would be willing to spend.

“By having a trading plan and sticking to it, regardless of which external factors come into play, you can avoid acting impulsively out of fear and maintain a sense of balance,” Mosime said.

Mosime said another problem that traders face was greed.

“When the going is good, knowing when to exit a transaction and be satisfied with the profits is crucial. The feeling of greed is best identified by the urge to make just a little bit more profit even after meeting your goals.

“Here, as is the case with managing feelings of fear, sticking to a trading plan can ensure that greed does not undermine your good sense of judgement,” he said.

Keeping a trading journal is another way to fight greed. It lists all of the trades that have been made, the results of those trades, and, very simply, which strategies are working and which are not.

Mosime further said that keeping a trading journal will ensure that the traders emotions don’t ‘run away with them’ and that they don’t fall prey to the desire to stray from their risk management strategy when motivated by greed.

Lastly, knowing one's limits is imperative. Mosime explained that another way traders can ensure that their sense of rationality is not to be overrun by their emotions is by setting stop-loss orders.

“These are limits that are set per trade to lock in a predetermined level of profit on an existing position. Not only does this allow traders to control their exposure to risk, it is also an effective way to make sure that you abide by your limits and stay on track to realising your long-term vision,” he said.

Mosime explained that one of the helpful realisations traders could have is that beyond micro and macroeconomic factors and realities like market volatility as humans, traders are often their biggest risk.

“Finding ways to keep emotions under control and to avoid acting on them when the pressure mounts is arguably one of the greatest assets that traders can have in their arsenal of tools,” he said.