Imagine the stock market as a big battle arena where:
- Bulls (buyers / demand / optimism) push / gore the price up.
- Bears (sellers / supply / fear) slap the price down.
The emotional roller coster
Most new investors struggle to control their emotions during trading and often end up losing money.
Emotions are unhealthy and dangerous for investors when they
- Lead to irrational decisions based on short-term pain.
- Cause you to lose sight of your strategic objectives and financial goals, whether it’s fear, anxiety or euphoria.
Most common emotional reactions are
- Stress and panic.
- Regret or overreact during times of stress, euphoria or panic.
A successful investor
- Is rational in stressful times and sticks with an investment strategy.
- Avoids getting fixated on irrelevant data (ex. stock price focus).
- Focus on relevant financial facts, market trends, technical patterns and strategies.
THE FEAR & GREED CYCLE
Fear is when you are scared and afraid of the stock price to fall and you sell in panic.
Greed is when you're happy and excited about a stock rise and you buy more of those stocks.
"Be fearful when people are greedy and greedy when people are fearful".
- Warren Buffett.
THE FEAR & GREED INDEX
To get a feeling of the markets current fear vs. greed level, use the indicies below.
8 Psychological Traps Investors Should Avoid
Over-reliance on what one originally thinks.
Protecting previous choices or decisions.
Seeking self-delusional confirmation from others who have made and are still making, the same mistake.
Doing nothing and postpone the evil day when the losses have to be confronted.
Doing what others are doing and saying, even though their situation, views and context is different.
Believing that the past equals the future, acting as if there is no uncertainty in the market.
Seeking more and more risk if it looks like they are heading for a loss.
Overconfident and think they know better than the experts or even the market.
“Doing well with money has a little to do with how smart you are
and a lot to do with how you behave.”
– Morgan Housel, The Psychology of Money.
“Becoming financially independent is the greatest path of personal growth, because there’s so much you’re going to have to go through, and so many things about yourself you have to overcome to BREAKTHROUGH those barriers, and achieve that success. It’s a personal path of financial success and a path of personal growth, both of which are very rewarding”
– Todd Tresidder