Managing Greed and Fear: The Biggest Secret To Trading Success

"...be fearful when others are greedy and to be greedy only when others are fearful."

~ Warren Buffet, CEO of Berkshire Hathaway, Inc. "Chairman's Letter, 1986." [Link]

New traders tend to obsessively focus on which stocks to buy and at what price to buy them (i.e., "setups"). Almost no thought is given to the more abstract psychology behind trading. Picking bullish stocks is obviously important, as is timing the purchase ahead of upward movement. The reality is that there is always a bull market out there, in some sector and in some instrument. The setups are endless. So why isn't everyone successful at profiting from market speculation? The truth is that the majority of traders do not dedicate enough time to establishing the right mentality to systematically identify and enter all of these great trading setups. It is so easy to get caught up in theoretical gains and spread yourself thin across asset classes and investment instruments without establishing the "meta" first principle of trading success: mindset.

Self-reflection and introspection are difficult and daunting tasks, and trading psychology isn't nearly as exciting as hitting social media with the latest 10-bagger or pic-cap crypto token that is headed "to the moon." When processing a potential idea, our inclination as human beings is to focus on the external factors that may lead to the success or failure of the exciting endeavor. Also, we naturally focus on the biggest wins and everything favor of future success and do not give adequate thought to potential losses, conveniently skipping our worst trading losses and investments. And when we do consider the choices that led to our failures, we tend to attribute the causal factors to external forces. If you give sincere consideration to the content of this article, then there's a good chance that you will tweak your trading strategy and gain a modicum of sanity in this brave new world. These nuggets of advice are bestowed by our most senior trader, who has three decades' experience in trading volatile markets over many macro-economic cycles, and has experienced many 1,000%+ winners, and many -80%+ losers.

Mindset is everything.

When I am in an optimal mindset I am able to see things clearly, evaluate information objectively, and act decisively/effectively. I am in the flow, not in resistance. I am at peace, and if a trade reaches my stop loss level I experience it with equanimity.

When the market gives me what is typically perceived as "negative" information, I view it neutrally, it is not painful. It just is. It's more information for me to process.
When the market gives me what is generally viewed as "positive" information, I view it neutrally, the flowers don't smell sweeter and the sun doesn't shine brighter. It just is.  It's more information for me to process.

Mark Douglas, author of the trading tome "Trading In The Zone"  coined the term "Now Moment Opportunity Flow"  - The now moment opportunity flow is what a trader experiences when they are completely present in the moment and processing new information objectively and free from fear/greed. They are not seeking anything from the market, and the information the market is sending is not interpreted through a bullish or bearish filter. Everything is neutral, it is my interpretation of the information I am processing that creates the "charge" (the emotional response).

Being in the now moment opportunity flow also means having a flexible and open mindset, anything can happen and I am only reducing the potential possibilities by holding a rigid view. Ultimately the market is always right, the market price is the right price, in that moment. The market price will change in the future, but in this moment the market price is the only correct price.  If I engage the market with the view that the market is wrong, and I am right, then the only person that will suffer is me.

The market price is the only thing that all market participants can agree on at a given point in time, it's the price now - will it change? Yes, of course. How will it change? When and in what direction? If we ask those questions, then we will get a million different views from different market participants. However, we can all agree that the S&P 500 closed at 4173.85 on Friday. The price is the only truth we can all agree on, and it is the starting and ending point for any market analysis.

Emotions of fear and greed are also hindrances to experiencing the now moment opportunity flow - if I am fearful of what information the market will send next,  then I will be unable to objectively process market information. If I am fearful, I am also more likely to take action in the market based on these fears instead of objectively assessing the market.

Greed and fear

The simplest answer to this question is that when we are approaching markets with an ineffective mindset based on a desire to "get something" then it is very easy to fall into a cycle of making choices rooted in fear & greed.

As humans, it is completely natural to experience emotions of fear and greed. Fear taps into our deeply rooted survival instincts, fear helps keep us safe. However, it also cuts us off from unlimited possibilities. Greed also comes from deeply rooted base instincts. As small children when our friend was eating a tasty cookie, we wanted one too, and if we didn't get it we threw an hysterical fit until our parents gave in and got us a cookie. Now as adults we see our friends and neighbors buying a new lambo or posting screenshots of how much they're up on their Dogecoin position, and we want our cookie too!

It's just that now the 'cookie' is in the form of a speculative financial asset such as a stock or a cryptocurrency, and this time there is also a significant chance that we will end up with fewer 'cookies' than we started with. However, that's not how greed thinks. Greed is only focused on the fear of missing out and the possibility of 'gaining something' that we perceive someone else has. Greed doesn't manage risk, it is solely focused on gain. This focus on potential gain comes about even when we already have more than enough, and especially when we are not accurately assessing the potential downside risk.

Checklist For Staying Stuck In A Fear/Greed Mindset And Being A Maximally Ineffective Market Speculator:

If you really want to be sure to be maximally ineffective as a market participant then here is a really good list of ways to remain stuck in a fear/greed mindset:

• Spend a lot of time focusing on what other people are doing and how much money they tell you they're making, especially the Twitter traders who always seem to be long the hottest stocks, and short the biggest losing stocks on any given day.
• Obsess over high watermarks: If your trading account peak was $88,000 and now it's $65,000 you should focus on "getting that $23,000 back", after all that's your money! The same goes for stocks, if you bought a stock at $14.00 and now it's $9.00 the stock "owes you" that $5.00 per share.
• Make sure you are trading on margin and stick with a highly concentrated portfolio of no more than a handful of positions.
• Watch CNBC and as much financial news media as possible.
• Be sure to sign up for at least a dozen trading courses, each one preaching a slightly different strategy. This way you can practice using 118 different technical indicators, and you can always be clear on what you should have done in hindsight.
• Focus on the hottest trending stocks and chase every breakout stock, especially during broader market corrections.
• Stop losses are for losers.
• If other people are bragging about how much money they are making in a stock/crypto that means you're missing out - don't worry about the downside risk, the FOMO is too strong and you don't want to feel left out!
• You have to trade every day. In fact, if you're not trading in and out of multiple stocks every single day then you're clearly missing out!
• Don't develop a process/strategy or trade checklist, put on trades based upon how you "feel" and stuff you're reading/hearing.
• If a trade is working and your P&L keeps going up it's probably best to just get out and take the profits. After all, how dumb would you feel if the stock went back to your entry and your profits vanished?
• Stay intently focused on your 'feelings'  and be sure to remind yourself that YOUR perception of market behavior is the only correct one.
• Create a narrative to explain market moves/behavior after they have happened, this narrative doesn't have to be based on any real facts. As long as it works for you that's all that matters!
• The more technical indicators you can put on your charts the better.
• If a trade doesn't move in your favor at first it's ok, just double down. Build positions bigger the more price moves against you!
• You don't lose if you don't sell. Remember to keep telling yourself that you'll get out when you get back to even.

You can do all of the above and stay stuck in a fight or flight mindset in markets, OR you can choose something much different and create practices/habits that support a healthy mindset for optimal trading performance. A mindset that will help you not only achieve superior performance in markets, but also better health, peace, and joy in your life.

How do I create a good mindset for trading?

Mindset is a rich topic and one which I will blog about more in the future, but here are some good places to start:

• Get ample sleep each night - getting 7-8 hours of sleep each night is fundamental for our mental and physical health. I have noticed over the years that when my sleep routine is disturbed and I am not getting enough restful sleep, my performance in markets also suffers.
• Practice healthy eating habits including drinking plenty of water and avoiding refined sugar and processed foods as much as possible.
• Exercise every day - this can come in many forms but the key is moving your body, sweating, and elevating your heart rate. For me yoga and meditation are fundamental habits that I have created in my life. I also like to go for 30-45 minute walks each night just before sunset.
• Just as we need to be mindful of the food we put in our mouth, we should also curate what information we put in our brain. Read uplifting, positive, and educational material. Listen to the smartest people and try to learn from them. Curate your information intake.
• Create a daily trading routine that includes the answer to some of the following questions: What time do you wake up each day? What are your first morning activities before you sit down in front of the market? How long will you stay seated before getting up and taking a walk? And how many hours per day will you be engaged with markets?
• What is your daily loss limit? Is it a percentage of your account equity? Or is it a dollar amount?
• Develop a risk management assessment process for each new trading position - this includes the percentage of equity you are willing to risk, position size, time frame, etc.
• Develop a trade checklist: Boxes that you must get checked off before taking a new trade, if one box isn't checked then you don't take the trade.
• Practice monitoring your breathing during trading hours - are you taking shorter breaths when you're in a trade? Practice taking deeper more conscious breaths throughout the day - the '4-7-8 Breathing Technique' is powerful and effective.
• Practice releasing attachment to your trading equity and trade outcomes - when we release attachments to outcomes we are better able to embrace the "Now Moment Opportunity Flow".
• Every moment in the market is unique and anything can happen. When I truly embrace these truths I am better able to process what is happening in markets, and more effectively able to capture outsized winners, while avoiding outsized pitfalls. I don't have to be right, and I know I'm going to be wrong a lot in markets - it's how I handle when I am wrong and right that makes all the difference in my market performance.
• Monitor your mental chatter - what are you telling yourself? What is your self talk around profitable trades vs. unprofitable trades?
• Reduce distractions - If you are able to have two hours of focus each market day, you will have all the opportunities you need to be very profitable over the long run. Two hours of focus is far more effective than 200 hours of noise and distractions.  Markets are hard enough, the last thing we need is to create more challenges for ourselves through distractions that put us at an even bigger handicap.
• If your routine is interrupted or you know that you are not going to be able to be at your best on a given day it's ok to take a day(s) off. The market will always be there when you're ready, don't force it. Walking away is sometimes the hardest thing to do, and it can often be the best choice to make.

To summarize my thoughts on the optimal market mindset it really comes down to balance. When we are 'tilted' and seeking something from the market, we are not going to be in a position to make good decisions. The best trading is not gambling, far from it. The worst trading is 100% gambling. The best market participants are in control and keenly aware of when they begin losing control.  

When I am practicing yoga 4-5 times a week and meditating twice a day, I am usually at my best as a market participant and feeling my best as a human being. When I am eating poorly and not getting enough sleep, my trading results tend to suffer. This probably isn't an accident. The way we do one thing is the way we do everything, one choice feeds into all the others. The optimal mindset is not just a trading mindset, it's a LIFE MINDSET. Trading markets simply shows us everything about ourselves in a highly amplified manner.

If nothing else, if this post gets you to stop trading on margin and start practicing yoga more often, then it will have been a success. ‍