Of greed, fear and noise
writes Shafiqul Alam | Friday, 4 March 2011
writes Shafiqul Alam
Stock market trading is an activity that is controlled by human emotions. It is inescapable that there is always a fear of losing and the greed to win. The behaviour of "Noise trading" is also coupled with these emotions. Even if one studies the fundamentals of a listed company, he still consciously or subconsciously depends on "noise trading". Greed and fear are the two basic human emotions at work in the stock market. These two emotions are the motivating force behind almost all market participants. In the case of trading, when a declining trend comes, the regret and frustration can carry over into the next trade. This particular problem is fuelled by the expectation that every trade one enters into should be money-spinning. But the fact is, not every trade will be profitable! Greed creates the reverse problem. With a couple of consecutive profitable trades, the ego can be enlarged and one can feel himself to be unbeatable. This would eventually lead one to such kind of trades that he normally would not have entered into. When stocks make strong moves to the upside, greed from all the cumulative market participants joins the move that leads to upward movement of the index. But the tragic thing is that the stock prices usually fall faster then they go up, and when this happens, fear grips all the participants. Despite reaching the "sell" price, many hold on because greed is by their side, hoping for a further increase. Next day a heavy selling might start but still greed suggests one to hang in there and the price would come back. The price keeps going down rapidly and subsequently, fear starts to grow. But by that time, it is too late and one's nice profit has turned into a loss. One might be saying that greed and fear will never get in the way of his trading, but greed and fear always will be in trading. It is not something to be ashamed of. It is something one has to admit to, if one is to become a successful stock trader or investor. "Noise trading" is one of the market forces that cause equity prices to deviate from their true values. The term 'noise' describes the constant changes in market prices and volumes that cause investors to get confused about the market's direction. Most "noise traders" believe they are making sound investment decisions when they follow market noise. Nobody knows exactly what would be the maximum and minimum price of a particular share. People think that the capital market is just a money spinner and once one has invested, he would get a handsome profit within a short time. They should keep in mind that traditional banking gives 9-12 per cent interest per annum and thus dream of realizing a profit more than 20-30 per cent or even more within a few days or a month is never wise because there is always a chance of a reverse swing. It is extremely vital to focus on not losing instead of focusing on the potential profit because if one loses, especially the small investor, he might not be able to trade further. Thus, discipline is what will make one take a profit at the right time, get out with a small loss at the right time, wait for the right entry point or perhaps not trade at all. The other factor is self-control over greed, fear and noise. Absence of this control has led to sharp rise and drastic fall in our capital market, besides factors like manipulation (which is focused by many). The writer is an engineer and is currently studying MBA (Finance) at the University of Dhaka. He can be reached at: e-mail: [email protected]
Stock market trading is an activity that is controlled by human emotions. It is inescapable that there is always a fear of losing and the greed to win. The behaviour of "Noise trading" is also coupled with these emotions. Even if one studies the fundamentals of a listed company, he still consciously or subconsciously depends on "noise trading". Greed and fear are the two basic human emotions at work in the stock market. These two emotions are the motivating force behind almost all market participants. In the case of trading, when a declining trend comes, the regret and frustration can carry over into the next trade. This particular problem is fuelled by the expectation that every trade one enters into should be money-spinning. But the fact is, not every trade will be profitable! Greed creates the reverse problem. With a couple of consecutive profitable trades, the ego can be enlarged and one can feel himself to be unbeatable. This would eventually lead one to such kind of trades that he normally would not have entered into. When stocks make strong moves to the upside, greed from all the cumulative market participants joins the move that leads to upward movement of the index. But the tragic thing is that the stock prices usually fall faster then they go up, and when this happens, fear grips all the participants. Despite reaching the "sell" price, many hold on because greed is by their side, hoping for a further increase. Next day a heavy selling might start but still greed suggests one to hang in there and the price would come back. The price keeps going down rapidly and subsequently, fear starts to grow. But by that time, it is too late and one's nice profit has turned into a loss. One might be saying that greed and fear will never get in the way of his trading, but greed and fear always will be in trading. It is not something to be ashamed of. It is something one has to admit to, if one is to become a successful stock trader or investor. "Noise trading" is one of the market forces that cause equity prices to deviate from their true values. The term 'noise' describes the constant changes in market prices and volumes that cause investors to get confused about the market's direction. Most "noise traders" believe they are making sound investment decisions when they follow market noise. Nobody knows exactly what would be the maximum and minimum price of a particular share. People think that the capital market is just a money spinner and once one has invested, he would get a handsome profit within a short time. They should keep in mind that traditional banking gives 9-12 per cent interest per annum and thus dream of realizing a profit more than 20-30 per cent or even more within a few days or a month is never wise because there is always a chance of a reverse swing. It is extremely vital to focus on not losing instead of focusing on the potential profit because if one loses, especially the small investor, he might not be able to trade further. Thus, discipline is what will make one take a profit at the right time, get out with a small loss at the right time, wait for the right entry point or perhaps not trade at all. The other factor is self-control over greed, fear and noise. Absence of this control has led to sharp rise and drastic fall in our capital market, besides factors like manipulation (which is focused by many). The writer is an engineer and is currently studying MBA (Finance) at the University of Dhaka. He can be reached at: e-mail: [email protected]