Greed and fear are the two dominant emotions that affect the stock market. Although there are many other factors that influence the change in stock price, these two emotions are the underlying cause for the unpredictable fluctuation of stock price. As emotional creatures, humans make trade decisions all the time based on their feelings about the given market conditions. However, trading decisions influenced by emotions of greed and fear and stock trading success are two things that generally don’t go hand in hand.

So how do these emotions really influence the individual traders decisions? More importantly, how can a trader avoid emotional trading?

Holding a stock in fear as it drops in price is a classic way traders lose money.

Say the typical trader buys a stock and it slowly goes down for a few days after the purchase. The trader is a bit worried but he still keeps his composer because he is certain that the stock will come back up. He holds for a few more days and the stock continues to inch downward. At this point the trader has lost a large percent of his original position.

Now the panic starts to kick in…

The trader begins to panic but he doesn’t sell off because this is too much of a loss to bear. He can’t afford to lose such a large chunk of his portfolio especially since he thinks the stock will come back up any day. The trader is praying that it will bounce back up just enough so he can at least break even. Yet as he clings to his position in fear, stock continues to fall. Finally he sells the stock partially out of fear that it will drop even lower and also because he can’t bear the pain of holding the failing positions anymore.

This is a prime example of how the fear affects traders. Holding onto a stock because you have a hunch that the price will bounce back up is a dangerous way to interact with the stock market. Because of the markets unpredictable nature, you can never be completely certain of what might happen next.

So how would the greed influence this same unfortunate trader?

Keep in mind that after the trader lost such a large sum of money, he wants…

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