How Fear And Greed Affect Your Trading

Hey everybody, it’s Michael Martin. Thanks for being here. So it’s going to be a great week. I have some amazing topics and we’ve been getting really, really good questions. So I figured out which ones I’m going to cover here on Monday, Tuesday, Thursday, Friday, and then which ones I’m going to do with Ganja on Wednesday. And a lot of really good material out there, a lot of great comments coming in. Thank you so much. As always, if you wouldn’t mind, please consider subscribing and liking the channel. Click the bell so you can get updates. The data that we get is really amazing and we really sit and let it steep for a while. Try to come up with the best material, which hopefully the channel’s growing. You like the material, it really serves the whole community. We have this ongoing conversation on the mental aspects of trading as it would relate to trader psychology and emotional intelligence.
So I didn’t get a question necessarily about fear and greed, but the tone of some questions that came in recently, like the past two weeks had a real big theme of being in and around fear and then being, say, overzealous about one’s ability. So I thought might have a short conversation today on fear and greed and how it can creep into your mindset, and it’s pretty important because as soon as you start to have a bias about anything, you know, might want to just hit pause for a second and figure out what that means because one trader called it intuition wishing. So fear and greed. I think those terms are terms that can mean different things to different people. So the expression data science data scientists use is we would need to operationally define what do we mean by fear and greed. So fear can show up as a feeling you’re afraid of something, probably the unknown or you’re afraid of your continuing losing streak will continue. You’re afraid that your drawdown might increase in terms of magnitude, it might last longer than previous ones. Your fear is that since we’re dealing with probabilistic outcomes, that the economy is what it is. The debt ceiling is an issue.
April CPI came in, what, 4.9. So that can creep into your mindset too and kind of get you to be resigned that the world is going to be tough. And while I think you need to be aware of what’s going on in the world from a macro sense, I do think you have to stick to one’s knitting, as they say. So you have the fear of missing out and you have the fear of loss, right? Losing money, loss of opportunity.
I always think of opportunity cost. What am I forsaking today by being or doing what I’m doing in terms of effort? And that does come up for me too, even in making the show, because I’ve got to take time out of a pretty busy schedule to sit and record stuff. Then it has to be edited. There’s a whole bunch of aftermarket, as you would call it that has to get done. Then there’s the fact that there’s no sense in creating videos if the content isn’t up to snuff, because I don’t need to hear myself talk. So I try to absolutely keep my ears to the track to make sure we’re talking about things that are resonating with the community or a good chunk of them. Anyway, you can’t hit all everybody, but you can certainly thematically deal with or talk about things that are going to resonate with many, many people.
Then you have on the greed side, hubris maybe, right? You have a winning streak. Now you’re onto something. Maybe I’m going to trade bigger. Maybe I’m going to start to take flyers because I’m in the groove. And that’s all processes that you need to work out. In other words, I feel you need to know how to calibrate your greed. So typically one of the benefits, for example, and I’ll give you a compare and contrast, if you’re using, like we talked about mechanica or trading blocks as trading engines to simulate trading, the good news is that if you’re risking say one half of 1% on a trade of your overall capital, that’s going to be consistent, whether you’re in a drawdown, whether your account’s flat or whether you’re up 40% because the machine’s going to always calculate whatever one half of 1% is right. Then you’re probably going to figure out what’s the volatility of the instrument that you’re thinking of, what’s your entry?
And then you’ll figure out your position size, which is how, where we make and lose money. But we want to be able to understand where our greed comes from. Is it excitement, right, about your ability or what you think your ability is? Because again, greed, people just throw the term around. People are greedy. There’s certain folks in the media or in politics who feel like all speculators don’t work at all, and all they do is make a million dollars for not making any work. I mean, that seems to be the tone out there, and it’s kind of an ignorant way to look at things because there’s an enormous amount of math and science that goes into speculation and trading and managing risk, and I’ve never thought that there’s anything easy about it. And whatever I’ve made and lost is up to me. That’s on me. It’s my responsibility. I can’t blame anybody else. No. Also, as far as making money,
I don’t recall in 35 years ever hearing a question or a statement that someone broke into someone’s office, held a gun to their head and made them trade markets to deliberately take losses so that other people could win. No one’s a victim here. People willingly come to the marketplace to participate in the market, and they know, or at least they should put a lot of thought into what it is that they can lose. So I think of greed as something that’s necessary right in it. But there’s a difference between greed, which is almost like I’m, you’re insatiable versus having growth goals. Cause I think there’s a difference in greed. You might not put a lot of thought into your activity. You might kind of believe what you want to believe. You might also be have a, I don’t want to say a fair weather kind of memory and forget how hard it was when it’s hard.
Usually after you’ve been around the block a few times and gotten your head kicked in, you just kind of take things in stride anymore. But I think there’s a big difference between greed and then having growth goals. Growth is important because it helps you conjugate your activity every day and helping you change your life, because if you’re not really growing, what are you doing then? I don’t know that you’re dying, but you’re certainly not making progress. So I think it’s healthy to have goals. That’s what successful people do. They constantly have goals. They’re constantly reinventing themselves, not because they’re fickle, but because once you hit a goal, that becomes your new comfort zone. So you can hang out there for a while, not unlike a stock going up and then channeling ready for the next breakout to the upside. Some people think in terms of bases, so you can have a lot of bases inside, like a stage two breakout, nothing new there.
But if you don’t really think about it and you let your breed go unbridled, it can oftentimes put you in a very difficult spot because you might find yourself in too big of position. And that’s happened to me invariably. Look, if you’ve done this long enough, you’re going to come across every single instance of how to screw things up because there’s too many of them. And one of the reasons why we talk about that here is because, again, it’s not about chart patterns. In many ways, yes, you need to have setups maybe, or you need to have a systematized set of rules. Obviously all of that has to add up to a win loss ratio as well as ratios between your winners and losers where you multiply the whole thing out and you have positive expected value for all your activity. You see, I think it’s a little harder to do for discretionary traders because when do you know that you’ve had enough data to look back onto what you’re,
To know that you’re doing it in a way that you can rely on yourself? It’s true. Simulation is not predictive, but in my experience, if you have a systematized set of rules that you’ve back tested through either of the aforementioned trading simulators, those results don’t typically turn on a dime. And I’ve talked about that. And you can have winning streaks and losing streaks, and yes, it’s an average, but the average is it’s like the 200 day moving average. It’s very slow to move. So you can have a system that worked in the eighties that maybe by the year 2000 didn’t work anymore. Its efficacy was muted for one reason or another. But like I said, it doesn’t work for the month of May and then all of a sudden not work anymore. When you’re a discretionary chart reader, you have to temper the fear in the greed because obviously you want to be in the game to make money, net net of everything.
You have net trading profits that can show growth. But I’m talking also about personal growth. What does growing your trading account do for you in your life? Does it help you finance single family homes? Do you start buying a level artwork? What do you do along those lines? How do you maybe change the quality of the money or take some of the money out, change the quality of it, and also maybe change the level of taxation? So that’s all tempered in there in your behavior, because ultimately what that’s talking about, fear and greed are feelings in your body, but they invoke you to have certain behavioral patterns when you fall into those pockets of emotional capital, you see? So we spend a lot of time making sure, especially on the institutional side, because they have a lot of buying power, they got a lot of clout, they also have really good information that they kind of keep things simple and they don’t look into things.
You can help somebody develop their intuition. That’s something that we’re good at, especially for me, because I actually have really good intuition. So there’s a lot of skill unto that as well. But I think you have to have some fear, a healthy bit of fear and a healthy bit of what I would say growth goals. Greed, again, is unbridled. I’m insatiable. I kind of constantly want, want, want. So we have ways to help people overcome that. But I think most of us though, have a decent amount of respect. Let’s call fear respect, right? Because I’ve been in that situation I’ve had in the futures markets, I’ve had limit moves against me, and they’re not fun. Saving grace, again, was position sizing in that I didn’t get killed even though I was locked in a position that was off for limit down. That’s the way it goes. Doesn’t happen a lot, but when it does, you know, have to be ready for that and you price that in. So there has to be, I don’t know, fear, but there has to be respect because you know how bad things can get, markets can move quickly
With without leverage, and you have to respect that. I don’t know that you have to fear it because fear can shut you down. And as they say about lotteries and stuff, if you’re not in it, you can’t win it. Obviously that’s a game of negative expected value, so it might not be a great example. And then in terms of greed, I think you do need to have to want more, but it’s normally attached to a goal because there’s purpose to it. It serves you somehow. You feel self-actualized in Maslow’s hierarchy of needs by being a risk manager.
So we’re going to talk about that and break it down this week. Obviously, if you have any thoughts, send them in because we can add them in or if you have any other questions, we can address them as well. But I do think people have both going at the same time, but as at the pro level anyhow, they’re kind of tempered. And those pros that we work with are very self-aware people and kind of know when one is kicking in, so they don’t let it get the best of ’em, right? That’s the key. It’s okay to feel fear, and it’s okay to feel greedy. The thing is, is that you don’t want to change your behavior from the baseline of what got you there in the first place. There’s a saying, right? You dance with the girl who brought you, so you have a certain process that you used to get where you are.
Once in a while, the market’s going to set up for where you can be an utter fear, and then you can shut down, i e, your behavior shuts down. Or you can be in greed where maybe your activity now accelerates, so you’re more active, right? You’re trading bigger. And there are times when you can do that when the markets are super hot and when they’re amenable. But you have to measure the results. The key typically is whatever you’re feeling, that’s a strong feeling in your body. There’s nothing wrong with that. You’re not a loser for feeling those feelings. You’re a human being, and I know it’s generalization, but everyone goes through those moments in time. It doesn’t have to be around trading. There can be greed about who’s got the bigger house, who’s got the best, this and that. So greed can manifest in many, many, many ways.
The key for the trader though, as it relates to making and losing money, is to feel those feelings, address them, realize that they’re part of who you are, but at the same time, not necessarily modify your behavior. So in a nutshell, and I’ll close it today by saying it’s okay to fear, it’s okay to feel feelings around fear and greed. The key part though is to temper your activity to make sure that your new model then, or you don’t change your model to reflect greedy behavior as well as change your model to reflect fearful behavior, fearful behavior. So I will say yes, there’s an asterisk on the last one because I did talk about when you’re in a drawdown, you can systematically take a further haircut on your capital to induce yourself to trade smaller, but I don’t necessarily know that’s fear. That’s just good finance.
You see, and if you know everyone’s trading systems and chart patterns, setups, so to speak, can have a seasonality to them, right? In commodities, that’s a big thing in the physical space is that their seasonality. In equities, you have seasonality because it’s earning season. Or maybe you have companies that can benefit from holiday sales, whether it’s Black Friday, cyber Monday, mother’s Day, Christmas, Hanukkah, new Year’s, that kind of stuff. There could be seasonality there too. But what I’m saying is that when you look at your p and l, you can find yourself in fear. If you can see the beginning of a drawdown, right? If you’ve had a rough two weeks, that can kind of sour your mind. Again, what do I say is the most important trait for traits? It’s attitude. So embrace the fear in the greed. Listen to those feelings. Try to decipher what they’re trying to teach you.
There’s a small chance that your greed might kick in because in fact, you were really onto something in the marketplace. Unfortunately, when you’re just starting out, you don’t know. So that’s why I wouldn’t go and start trading twice as big. I wouldn’t go from trading five contracts to 10. It’s too big of a jump. And if you’re using a fixed amount of capital as far as what you’re willing to risk on any one particular trade, and you’re looking at the volatility of that instrument, the move would be from five to six contracts, not five to 10. So you want, and likewise, if you’re cutting your position, again, you’re trying to preserve your capital. So I would tend to be maybe more aggressive and not go five to four, you can go five to two, right? Because you can’t have two and a half contracts. But that’s just because I think playing superior defense is really the name of the game. And even for speculators who were balls to the wall, hell, Ben, for election playing superior defense is why you know about the folks who are market wizards. It’s why you know about the people who’ve had decades long careers. It’s because they didn’t allow themselves to put themselves, they didn’t allow themselves to get into a spot based on their own behavior where they put their whole franchise at risk, you see? So anyway, thanks for being here today. I appreciate you and I’ll see you tomorrow.

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