Picture two investors facing critical moments:

Investor A buys shares of a tech stock surging on AI hype. Her initial target is a 10% gain. When the stock rockets to 15%, greed takes over. “What if this becomes the next Tesla?” she thinks, abandoning her plan. Days later, earnings disappoint, and the stock plummets 30%, erasing her gains. She’s left holding a loss, wondering why she ignored her strategy.

Investor B invests in a stable blue-chip stock, but a minor geopolitical event triggers a 5% market dip. Fear paralyses her. “This could be the start of a crash!” She sells immediately, locking in a loss. Within hours, the market recovers, and the stock rallies 8%. Her fear cost her not just money, but confidence.

These stories aren’t rare. They’re the norm. Fear and greed are primal forces that amplify losses and sabotage gains. But with the right mindset, they can be tamed.

Why Fear and Greed Are Integral to Trading

“The investor’s chief problem, and even his worst enemy, is likely to be himself.”

 Benjamin Graham, the father of value investing.

Fear and greed aren’t flaws. They’re embedded in the DNA of financial markets. Here’s how they shape trends:

Fear manifests as panic during crises. In March 2020, COVID-19 fears triggered the fastest 30% stock market crash in history. Investors sold quality assets at fire-sale prices, only to miss the 90% rebound that followed.

Greed drives euphoria. In 2021, retail investors piled into meme stocks like GameStop, pushing its price from 18 to 483 in weeks. Many held too long, ignoring fundamentals, and watched gains evaporate.

Markets oscillate between these extremes, creating opportunities for disciplined investors. As Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.” The key is recognising these emotions in yourself and the market.

Fear – When Anxiety Overrides Logic

Fear in investing or trading is the instinctual urge to avoid loss, often leading to impulsive decisions. It’s rooted in the brain’s amygdala, which triggers a ‘fight or flight’ response to perceived threats.

A common situation when primal fear grips the investors’ or traders’ decision-making process is analysis paralysis. It happens when a comprehensive analysis points towards a profitable trade, yet the person chooses to walk away from it due to pessimistic pressure.

Another manifestation of fear is moving stop-losses wider during drawdowns to avoid realising a loss, risking bigger collapses.

Greed – The Double-Edged Sword Of Ambition

Ignoring risk-reward ratios by holding a position for ‘just a little more profit’ despite deteriorating fundamentals demonstrates greed.

Or how about chasing every trend or signal, leading to commission burnout and diluted focus? That’s another case of greed!

Greed is the excessive desire for profit, often blinding investors or traders to risk. It’s fueled by dopamine, the brain’s ‘reward chemical,’ which spikes during winning streaks.

Tips To Keep Fear And Greed In Check Before You Trade

From Emotional Reactivity To Strategic Mastery

Fear and greed aren’t enemies. They’re signals. Fear warns you to check your risk. Greed reminds you to secure profits. The difference between success and failure lies in how you respond.

As psychologist Daniel Kahneman, Nobel laureate, noted, “The emotional tail wags the rational dog.” In trading, you must leash the tail.

Trade with clarity. Master your mind. Profit with purpose.

Open a live account with VT Markets to begin your trading journey.