What’s known is that 90% percent of all traders lose money, while 10% percent of them will go bankrupt. These are highly intelligent people, most with post secondary education, as they watch in horror as their trading accounts dissolve, taking one loss after another. So why do these traders fail.
The instrument that’s being traded in the markets, whether it’s stocks, commodities, or currencies, are all neutral and have no emotion. It’s rather the individuals, those who trade these entities, it’s the humans who are behind the trade that dictates the prices, this based on their emotions. The key emotions being fear and greed.
These two emotions drive the markets. Knowing this allows the successful trader to position themselves on the right side of the trade. Since humans are extremely volatile and make rash decisions, it’s often the wrong one.
The Daily Battle
There’s a daily struggle that’s waged, the moment the financial markets open. This is a battle between the bulls, the “buyers,” and the bears, the “sellers.”
The bears want to get top dollar for their equity, while the bulls want to pay as little as possible. In order for a transaction to be completed, one has to give in to the other’s terms.
If the greedy bull happens to give in to the seller’s terms, this because they just need to own XYZ stock, then the price goes up.
If an eager bear gives into the buyer’s terms, the price goes down. This isn’t anything new, as it’s just basic economics, supply and demand.
Since the buyer and the seller more often than not, base their buying and selling decisions on emotion, these emotions eventually culminates, and a trend will reverse.
For instance, when a stock is trending up, there will be a point when the trend becomes apparent to everyone.
Once it reaches this point, there’s a buying frenzy, as greed takes over in fear of missing the boat. It’s precisely at this point, that the trend often reverses.
The same is true for a downtrend. Before a stock hits rock bottom, there’s usually a selling panic, as fear takes over and the weak run for cover.
Once they’ve thrown in the towel, the stock is then free to rise up again. This behavior is observed time and time again, in any market.
Other Reasons For Price Fluctuation
Often, a stock doesn’t drop just because everyone starts to sell. It begins to drop because everyone stops buying, at which point the price has to come down, this to entice more buyers.
As the price declines, the selling picks up, forcing the price to sink lower. It isn’t until all of the sellers are flushed out of the market, that the selling stops.
The demand for the stock then becomes greater, which causes it to rise again, and begins to attract more buyers.
Getting A Grip On Emotions
What we individuals need to realize and accept, is that we have no control or influence over the markets, or the direction it’s taking. What we need to be aware of, is fear and greed.
Feel The Fear
The problem is that traders want to win every trade. If there’s a loss, it becomes easy to allow that loss to effect them emotionally, this because of the fear of losing more.
So the losing trader exits a trade once the stock hits a slight downturn, even though the market is bullish, and the fundamentals look positive.
So instead of holding, waiting for the stock to go up again, the trader sells and accepts the loss, this strictly out of fear.
Other Fear Of Loss Scenarios
A trader holds on to a losing position, hoping that it will go up again. Even when the news and fundamentals are hopeless, the losing trader won’t give up, knowing it can wipe him out.
Another form of fear, is not wanting to miss out. This is common for novices who buys in on the hype, or when the so called “experts,” sweet talks them into a trade.
A trader sees the market rise, which is confirmed by the news, and buys in on the frenzy of a rising stock that’s in full swing. Afraid of missing out, the trader hastily dives head first into the trade.
The Greed That Is Greed
Becoming euphoric once hitting a winning trade, is as detrimental as becoming depressed, when there’s a losing trade.
In this case, the trader is afraid of losing their profit, so they hold on to a winning position for too long.
The trade is in profit, but they want more. They’ve made 100% profit, but are now expecting to make another 100% percent.
Once the position begins to lose, the trader continues to hold on, hoping that the trade will get back to 100% again before selling. Instead of selling once it reaches say 80%, which is still a winning trade, they hang on.
Greed Is Not Good
These traders watch their profits erode, without doing anything about it. They hold on to their positions, until there’s a loss.
They say, ”Since the trade has gone down so low, what’s the point of selling? Might as well just keep my position.”
On the other hand, the fear of losing out on profit may cause a trader to sell a winning trade too soon. As soon as their position goes in the money even just a few percent, they sell.
Traders Need To Be Impartial
Traders need to accept there will be more losses than wins. What’s needed is the proper mindset to accept the losses.
What’s needed is a sound technical trading system, and the discipline to stick to it, one that produces profits in the long-run.