To Trade or Not to Trade

If you’ve ever watched a news story, movie, TV show, or even stock footage about the way the stock market works, no doubt you’ve seen the frenetic pace at which traders on the floor buy and sell. It is intense, often incomprehensible, and also addicting to a certain segment of the population,­ both financial traders and laypersons, who consider themselves the type who can succeed in such a high pressure, high intensity environment.

While market research and gut feelings have their place in any financial transaction, being able to read human behavior when it comes to money, particularly financial behavior, can be the key between taking yourself or your client to the poor house or down Easy Street.

There is a definitive psychology to trading that must be honed if one is to succeed in this fast paced environment in which split second judgment errors matter. Fear and Greed are two emotions that must absolutely be kept in check to have even a chance for success in a trading environment.

Fear: Fear is perhaps the most crippling of our emotions, whether you’re a financial planner or an investor. The frenetic pace of watching a stock price fall is a very difficult environment for anyone to hold firm to their prescripted plan of action. Fear is a natural reaction to a situation not going the way we think it should. Relying systematically on training, data, and previous experience can definitely reduce the effect of fear to a significant extent.

Greed: Regardless of what Gordon Gecko might have taught us in Wall Street, greed is not a good idea when you’re trading. Just like fear might cause you to panic and sell everything, being greedy can keep you from walking away before a position becomes unfavorable. We sometimes justify this type of behavior by telling ourselves we’re trying to get every last possible dollar on the table for ourselves or for a client, but that is often to cover up simply wanting to boost our own ego and prove how much smarter we are than “the other guys.”

Keeping these emotions in check is largely the work of developing your own set of trading rules, parameters that you never veer away from in order to keep yourself from acting rashly.