`HOPE AND FEAR

If you’ve been involved in the markets for any length of time you will no doubt have heard of the twin pillars of market psychology, Hope and Fear (or sometimes Greed and Fear).

In fact, if you’ve ever been involved in an endeavour where you have something on the line – a business, a wager, a job, or even a date – you will have experienced Hope and Fear in some form and the devastation it can play on your psychology.

Experiencing Hope

For most traders, Hope looks like this:

They’ve just bought a stock or commodity, and they hope that it goes up.  Of course, this is the name of the game, we all hope it goes up if we are buying!  But then the stock starts to fall, and instead of selling out, the trader holds on with the hope that it will rise again.  The more the stock falls, the more they hope and pray that it will rise.

But they don’t realise – Hope does not equal Action.  And only our Actions make money in the stock market.

Experiencing Fear

The other side of the coin is Fear, and for most traders, it looks like this:

They’ve just bought a stock, and it has begun to rise.  It might look “over-valued” to some fundamental investors here.  They start to fear that the longer they hold on, the more likely it is the stock will fall back again.  So they Sell, out of fear – and the stock proceeds to make a further 40% gain.

They did not realise that Action born solely from Fear is not a healthy or right action.

The Proper Use Of Hope And Fear When Trading And Investing

As we’ve seen – most people fear their profits, and hope on their losses.  This is counter intuitive to the ONLY universal rule in trading: Cut your losses and let your profits run.  When trading or investing we must USE fear and hope, instead of them using us.

• To do this, we must FEAR our losses, and HOPE on our gains.

We must FEAR that our small loss will turn into a big loss, and “get the hell outta Dodge”.  Similarly, we must HOPE that our small profit will turn into a large profit, and let it run its full course.

In this way, we are cutting our losses.  In this way, we are letting our profits run.