Mind over matter is a phrase commonly used to describe the psychological power that individuals possess and the ability to control physical conditions and problems using the human mind. In financial markets, the situation is no different. Material prowess means nothing unless you have the sufficient mental power needed to weather all storms.

As a matter of fact, experts believe that psychology plays the biggest role in trading. An old saying on Wall Street states that fear and greed drive markets. It is terribly easy to succumb to these emotions. It doesn’t even matter if you are winning or losing, it is still possible to become afflicted by these two emotions. 

It takes years of experience to become a tough market participant and finally gain an edge in the market. Most world-renowned investors regard cryptocurrencies as a market where fear and greed have the highest influence. Are you one of those that cannot resist urges and are a slave to an impulsive mind?

In this article, we will dissect the two main emotions that investors face. Only by understanding them, we can get a grip on our investing journey. After reviewing greed and fear, we will also showcase their specific influence in the cryptocurrency market. 

How Greed influences your trades

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Within the crypto community, traders commonly refer to greed as FOMO. Standing for ‘Fear of missing out,’ the emotion creates anxiety which causes you to severely influence your trades. Most of the time, investors simply experience greed as a result of thinking that they are missing out on opportunities. Likewise, it is easy to believe that you are late to the market and that it will catapult prices while you are a bystander watching the screen.

Why do people experience FOMO and greed? Because they are not in a position. Similarly, one may become greedy if he is inexperienced and wishes for overnight success. We have examples of ‘booms’ where significant interest in a niche market led to a sudden and massive rise. 

In the 90s, the craze surrounding internet stocks led to the dotcom bubble. More recently in 2017, Bitcoin’s own surge in popularity led to a massive influx of new investors. Most have found out about cryptocurrencies too late and have invested at the very top. 

Through the advancement of the internet, we now have a microscopic view of how greed works. In this specific case, we saw cases where some people sold houses, cars, and other valuable possessions to buy a risky asset at extremely overextended prices. This kind of get-rich-quick thinking ruined most new investors, who never returned. 

Managing Greed

Another old Wall Street phrase says that ‘pigs get slaughtered.’ In this context, pigs represent a slang term for greedy investors. Indeed, this kind of investor does get slaughtered by the market in the end. Be it entering a position on a whim, using too much leverage, or not taking profit, greed comes in all shapes and sizes. 

But how do you overcome greed? Most believe that it is extremely difficult to suppress this emotion, especially when you are on a run. 

For most, awareness seems to be the key. If you are aware of your actions and emotions, you will never make a mistake, at least an impulsive one. By doing so you can not only improve your game when it comes to planning trades but when it comes to executing them as well. After all, a trade which you did not execute as originally planned is no trade at all. 

Another crucial factor is to introduce rules. Risk strategies mean everything to an impulsive mind and you can leverage them to stay far away from greed. Are you prepared to trade today? Then plan ahead for a viable entry, set a stop loss, and decide for a profit target as well. 

If prices did not hit your entry, it is alright since you can always trade tomorrow. At least you did not jump in at a high entry. What about the stop loss? It will help you manage risk by protecting your position. A 10% loss is better than having your entire position liquidates. 

As for the profit target, it will help you stay true to your convictions. If you let your trade run and exceed your target you may get lucky a few times. But for a majority of your trades, you will ruin what was previously a good trade and risk having the price retrace.

How fear influences your trades

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If we consider these emotions to form a certain duality, it is possible to view fear as the other side of the coin. It is no different from greed, affecting your trades only in the opposite way. Fear is the mind-killer. It is the emotion that holds you back and prevents perfect trades from being executed due to a feeling which leaves you thinking that the worst has not yet come.

Fear usually occurs after a trader experiences several losses in a quick session. One can also experience fear if the market traded in a downtrend for a prolonged time. It is easy to imagine how flash crashes and bear markets can lead to ‘market PTSD’ and completely immobilize the average trader.

The line between a bull and a bear market is not always clear. In fact, investors usually discover if one ended or just began once it is too late. Due to that reason, investors are often warry and might exhibit excessively protective behavior. 

Fear affects both markets and lone individuals the strongest during herd behavior. In such a case, a majority of investors will trade the same exact way. Therefore, their actions could further propel markets which results in everyone’s demise. For example, a successive set of red candles combined with panic selling will always lead to stronger drops in price.

Managing Fear 

An investor should manage fear in the same way he controls greed. As previously explained, these emotions are eerily similar while remaining completely the opposite. A strong sense of control and discipline ultimately kills fear and radically improves your abilities. 

Today, investors like to use additional sources of communication and social media channels to predict prices. Most will use Twitter, trading groups, paid channels, and other forms of trading communities to discuss prices. But they can only provide you a view of the sentiment of retail traders. As such, they offer no real value. 

The ‘trading experts’ that you follow on Twitter may be right a couple of times or more, but they will ultimately fail to deliver consistent predictions. So why not rely on your own skills and intuition? Trading is a learning process and there is no better way than to learn from your own mistakes. 

Because of this, it is better for you to switch off the noise created by other market participants and think with your own head. Following the herd or counter trading market sentiment can never end well. Instead, we recommend that you trade as you would always do, with technical analysis. 

Does a piece of news or future event bother you and influence your trades? Turn off emotions for a moment and think about the situation objectively. More likely than not, you will discover a new perspective that sheds insightful light. 

One scenario unique to fear is the reluctance to buy the bottom. Red candles always appear dangerous. On some occasions, you will have the sense that bears are prepared to take prices further down. But ask yourself this. How many times did the price fall lower than your established entry? And how many times did you miss out on a perfect trade because fear struck you and you were too scared to open a position?

For the best results, it is advisable to balance out greed and fear. Individually, they represent the most dangerous entity a trader can face. But combined together, these emotions can foster a great sense for investing that can be entirely based on intuition. But naturally, you should combine it with technical analysis for the best results. 

Greed and Fear in the cryptocurrency market

In the case of cryptocurrencies, greed and fear are played out almost in the exact same way as in other financial markets. Emotions pervade all aspects of life after all and they can even stay similar in totally different environments.

As noted before, psychology and emotions play a far more important role in digital assets. Crypto traders react far harshly to events, news, and price actions compared to other traders. Moreover, they are more prone to ‘following the herd’, especially when seeing high-volume orders or significant events. 

Fear and greed are so prominent in this space that certain individuals created an entire indicator surrounding them. Simply put, the Crypto Fear & Greed Index showcases a range between 0 to 100 that indicates fear or greed in the market. The indicator is supported by several sources of social sentiment and emotions from the market which are processed by an algorithm. 

The indicator is exclusively applied to Bitcoin, but there are custom solutions as well which are focused on other major cryptocurrencies. The higher the number, the higher amount of greed crypto investors show. Likewise, a low number indicates higher levels of fear.

In both cases, investors should trade inversely. During moments of extreme greed, a trader should short or sell. Likewise, he should long or buy during moments of extreme fear. 

Which factors contribute to fear and greed?

The indicator’s developers formulate the estimated emotion based on five primary sources. A majority of the data is supported by market volatility. For example, volatility would be measured and compared with the market average of the past 30 or 90 days. If we see highly volatile markets, it may be a sign of a fearful market.

Index data for the last year

Market momentum and volume represent the second important source. By measuring average values for current trading volume and momentum, it is possible to combine them and analyze emotions. If there are high buying volumes in a bullish market, we can consider investors to be too greedy.

The other three sources come from social media, Bitcoin’s dominance, and Google trends. They respectively make 15%, 10%, and 10% of the overall data. While social media may be subjective, dominance and trends are definitely empirical values which can be objectively tested over a period of time.

Final word

In some respect, psychology dominates the world of trading far more than technical analysis. Greedy and fearful market participants have a higher influence on prices, no matter how wrong they can be. After all, the mind rules over matter and there is no way to forever leave the influence of herd behavior. 

In this article, we explained what fear and greed are. Moreover, we delved into both topics individually, to get a better grip on how these emotions work. As we have seen, they work eerily similar. In an abstract sense, they represent the same emotion. However, fear for example leads to the opposite reaction that greed would cause. 

While fear prevents traders from entering a position, a greedy investor will be a bit too ready to enter one. While a fearful individual constantly believes that we are in a bear market, the greedy investor will have a false sense that bull markets have no end in sight.

In either case, an investor can only improve his game by balancing these two emotions. No extremes in life result in a good outcome and we neither have this case in trading. By encouraging a disciplined mind that cares not for its emotions, it is possible to balance greed and fear and ultimately have them serve you instead. 

Controlling emotions is especially important in cryptocurrency markets. Digital assets are more volatile and as such, traders react far more harshly than in traditional markets. Respect the market and respect the value of time. This is the only way to weather all storms and panic, no matter how new or extreme a trading environment becomes. 

Tony Evans , Tokyo