The Eternal Battle Between Greed and Fear in the Stock Market
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For as far as history has it on record, greed and fear have been two of the strongest emotions influencing human behaviors and decisions.
When we consider them in the context of the stock market we can mostly agree that both greed, as a driving desire to have more, and fear, as an emotion so intense that can paralyze you, will have an immense influence on the direction of the overall market.
After all, we are all inherently affected by these emotional states and many can be overpowered by them. It’s imperative that we remember that succumbing to these emotions can mean the end of our trading journey before it really begins.
In very simplistic terms, collective greed and fear move the markets – NOT rationale and logic!
The unpredictability and volatility sometimes experienced in the market are largely dependent of the intensity of those two sentiments.
It is so basic and simple, yet so meaningful and relevant that entire indicators such as the “Fear & Greed Index” have been developed to gauge their impact and convert that information into meaningful data that helps traders make better decisions.
The sooner you can understand that the faster you can position yourself to benefit from that knowledge.
The premise is that excessive fear will coerce a trader to remove money from the market by selling shares or closing a position.
That will drive both the demand for the stock and its price down. Conversely, excessive greed will compel a trader to buy inordinate amounts of shares of a stock which will increase its demand and therefore the price along with it.
In other words, collective fear in the stock market can devaluate an otherwise valuable company just like collective greed can overvalue an otherwise worthless company.
This can create tremendous opportunities for those that understand this but invariable risks and probable downfalls for those that don’t.
If you haven’t figured it out by now, fear and greed need to be kept in check or they will wreak havoc in either direction.
Therefore, collective economic sentiment, personal beliefs, and the overall perception of general economic conditions, will determine the direction of the overall market.
It’s imperative that we not only understand this but that we actively and continuously base our trading decisions on objective information and predetermined actions.
Achieving that will help us remain one step ahead by proactively managing our risks and limiting our exposure.
The bottom line: Control your thoughts because they determine your feelings which then drive your actions.
It may seem simple but there is a great amount of information and value in that one sentence. Your ability to achieve this will decide your trading outcome.
Breaking News or News in general
Positive news may persuade traders to buy (long) a stock and maybe even keep in their portfolio which creates demand which increases the price
Negative news may persuade traders to sell (or short) a stock which will reduce its demand and decreases the price
‣ Whether it is a paid promotion company/individual, or unscrupulous people on the internet, there are groups and companies that are solely dedicated to promoting and overhyping an otherwise crappy or scammy company for the sole purpose of making money for their clients or specific unethical entities. This is the same thing as “Pumps & Dumps” where a known person, celebrity, Insta-Famous quasi-celebrity, etc. would have already bought shares (taken a position) in a particular company and then will excessively tweet, pay for commercials or ads, etc. to garner interest in that company from the masses and then once the “company” price rises, they’ll sell their shares (typically a very large amount) which will begin the decrease in price and consequently a mass of panic sellers coupled with short sellers taking advantage of that opportunity that will completely collapse the ascending price action extremely fast and destroy many beginner trader’s accounts at the same time.
Analysts or Popular “Influencers”
‣ The “professional” analysts sway large amounts of traders/investors one way or another. I use “professional” in quotes because it is very difficult to find an unbiased person that can honestly evaluate/assess a publicly traded company or startup company pre-IPO based solely on fundamental analysis. Not only that but with the increased popularity of trading brought up in part by the pandemic, as well as the multiple government economic provisions and the emergence of many new commission-free brokers, millions of new traders and trading enthusiasts flooded the market and have contributed to what is arguably a market bubble that behaves even more erratically than the most ambivalent year preceding it. In other words, this current market conditions can be so volatile that any self-professed stock market forecaster or pundit can say something–accurate or not–about a particular company and his or her followers can send the company’s stock flying or spiraling for no coherent or logical reason other than “YOLO” or “FOMO” from their zealot followers. This relative novelty decreases and sometimes completely nullifies most of the otherwise credible assessments an opinions or professional analysts. When a croup of “trading degenerates” from a sub-reddit can blow up a mid-size hedge fund to the tune of millions of dollars, it would be wise to recognize the paradigm shift taking place and threat much more carefully than ever instead of blindly believing any analyst, guru or forecaster.
Stock Splits and Stock Reverse Splits
What is a stock split? It’s the process of splitting a share into multiple shares. Apple has had several stock splits throughout time. They, like any other legitimate company, may want to conduct a split as they did back in 2020 where they decided to do a 1-to-4 stock split to attract new buyers at a lower price per share. In essence, the company stock may be worth $400, has 10M shares outstanding and a total market cap of $4B ( $400 per share multiplied by 10M shares). The company board decided to do the 1-to-4 stock split and basically made it so each share was now split into 4 equal parts. Therefore, the price would decrease to $100 and new buyers would be coming in to buy as they rather own 40 shares instead of 10, for example. In other words, a stock split is typically seen as a bullish event, especially when the company is an actual profitable and legitimate organization and not some shady small cap. You may frequently see splits that are 1-to-2, 1-to-4, or 1-to-10, among others, but they can vary widely.
What is a reverse stock split? Well, the opposite as a stock split. If you had a 10-to-1 stock split, you’ve reduced the amount of shares from every 10 to now 1. It typically has the opposite sentiment as a stock split. You’re more likely to see reverse stock splits in small caps and Over-the-counter (OTC) stocks and it generally has a bearish sentiment as they can do it to increase the price-per-share from under a penny to a couple of dollars in efforts to appear more legitimate and become listed to attract more buyers.
To recap: Stock Splits are typically bullish events and Reverse Stock Splits are bearish events. I don’t believe you’ll see legitimate companies do reverse splits as it’s typically a sign that management doesn’t believe the company will appreciate and/or is trying to stay relevant or gain popularity or momentum.
If there were no way to profit off the market then people wouldn’t trade at all.
Knowledge is power and the more you know the better you’ll do–at least in theory. We as retail traders cannot compete with large hedge funds and other entities with seemingly unlimited resources, supercomputers, etc. So all we can do is study and prepare ourselves emotionally to be consistent and more knowledgeable than the “rest”.
Retail trading can be considered a peer-to-peer competition to an extent, so it is likley that knowing more than the average “trader” will give you a competitive edge and help you profit. Therefore, assuming that superior knowledge will provide the edge required to do better than the next person, then knowing what to really focus on for each scenario (short-term, swing trade, etc.) coupled with discipline to control one’s emotions and cut losses quickly once a trade is going against you, will typically provide the edge/advantage needed to become and remain a consistently profitable trader.
But if it were easy everyone would do it.
Being able to master control over emotions and innate habits will be the most difficult thing for most traders to become consistently profitable. We like to believe the hype and we like to think we’ll buy the next “amazon” and immediately become “successful”. There are no shortcuts to success and as Arnold Schwarzenegger once said: “…you can’t climb the ladder of success with your hands in your pockets…”. In other words, your success will depend on your ability to consistently work on yourself, your emotions, and whether you can maintain exceptional discipline throughout the entire learning process and thereafter.
I’ve known about the stock market for many years and studied it on and off for a long time, but it was not until little over a year ago, as of this writing, that I actually buckled down and got serious about trading. I decided to open a brokerage account and invest an inordinate amount of time in learning how to trade. I purchased several books and professional trading courses and tripled the amount of studying I had ever invested into learning anything in the past, only comparable to the time I invested for my two graduate degrees.
Although I believe I got a relatively quick hang of how to profit off the bubble market and momentum stocks, remaining profitable—that is, keeping the insane gains I was making–proved to be an impossible task, evidenced by three failures maintaining three relatively small accounts.
There are not enough words in the English vocabulary to adequately emphasize how important the psychological aspect of trading is in a trader’s journey.
I was making 100% gains in a relatively consistent basis with small accounts (albeit mostly over PDT) to only return those gains (and more from my principal investment) just as fast as I was making them.
Although I found a consistent strategy for my preferred type of trading, conquering the psychological aspect of trading–that is, not acting on impulse or trading out of boredom, or remaining disciplined, among other crucial tings–is still something that me and many other traders will continuously have to work on.
The good news is that like any other exercise, the more you practice certain behaviors, the better your body and mind will become at repeating them. I say all this to say that trading can be an amazing life-changing endeavor or a life-wrecking event and most of it will be determined by your ability to control your emotions.
And if you haven’t figured it out by now, controlling your emotions, especially when you’re dealing with something as impactful as trading, can be an extremely difficult task.
Trading is probably the easiest and hardest skill to master. Anyone can learn the technical portion but when you factor in financial aspects and the real-life consequences that your success or failure can have not only on your life but in the life of those around you, the stress can be unbearable for many and can make mastering the emotional component an impossible task.
Therefore, trading can be both the easiest skill to attain (technically) but the hardest one to master (emotionally). It’s something that can push all “your buttons” at once and unless you can continuously react in a logical and predetermined manner, you will not be able to succeed in the long-term. You have to not only develop a systematic approach but more importantly, always follow it.