Fear and greed — two emotions that spoil your decisions

Two scenes every trader knows by heart. In the first, a position is fifty pips in profit, a voice in your head says "better take it while it is there", you close — and price runs another two hundred pips your way. In the second, a position is two hundred pips in profit, this time you think "it is moving, I will wait for more" — and you hand back three quarters of the gain. Same person, same account, two opposite emotions. Fear and greed are not character flaws; they are the default settings of the nervous system, which is exactly why you route around them with a plan rather than beating them with willpower.

Why fear eats the profit before it has time to grow

Fear at the chart rarely looks like panic. It usually presents itself as good sense: "a small sure profit beats none", "I will wait for clearer confirmation", "I will sit today out, yesterday went badly". Every one of those sentences sounds mature, and every one leads to the same result — you cut off the right-hand side of your distribution of outcomes. What is left is small wins and full-sized losses, the exact inverse of what any sensible method rests on.

The mechanism is simple and well documented. Loss aversion, first formalised by Daniel Kahneman and Amos Tversky in their 1979 paper, means a loss hurts noticeably more than a gain of the same size pleases. So an unrealised profit registers first of all as something that can still be taken away from you — and the default reflex is to secure it, even when the plan says otherwise.

Fear also has four faces, and it is worth telling them apart, because each calls for a different response. The first is paralysis before entry: waiting for a setup with no doubt attached to it, which never arrives. The second is closing winners early. The third is the fear of missing out, which pushes you into the market only at the end of a move; I have written about that one separately in the piece on the fear of missing out. The fourth is the block that follows a loss — you skip a perfectly valid opportunity the next day because the previous one hurt.

Anna knows the second and the fourth especially well. She has 8,000 PLN on the account, so one percent of risk is 80 PLN — an amount whose loss changes nothing in her household budget. And yet her journal holds whole weeks in which she closed positions halfway to the planned level. Not because the market gave an exit signal, but because the profit on the screen started to chafe.

Greed arrives after a good run, not a bad one

People tend to picture greed as the appetite of a novice. In practice it is the other way round: it most often strikes someone who has just done well. A few wins in a row and a quiet conclusion forms — "I think I have this figured out". From that moment the small deviations begin, each of which looks harmless on its own.

Marek once described it in exactly those terms. First the position size grows from one percent to three, because "the setup is that good". Then instead of one position there are three, all pointing the same way, which in practice means one large position dressed up as diversification. Then the stop loss is moved back or deleted, because "price will come back anyway". Finally there is holding past the profit target and ignoring reversal signals — because it is still running.

The outcome is predictable: the day after a good run can give back more than the run brought in. Not because the market suddenly got harder, but because the risk on a single decision multiplied while the quality of decisions fell. It is the same mechanism that drives revenge trading after a loss — only triggered from the other side, by euphoria instead of pain.

What the Buffett rule actually says — and what the CNN index does not measure

The most quoted sentence about these two emotions comes from Warren Buffett's 1986 letter to Berkshire Hathaway shareholders, and it is about behaving contrary to the crowd.

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." — Warren Buffett, letter to Berkshire Hathaway shareholders, 1986.

The logic behind it runs like this: in the middle of a trend the majority is right, but at the extremes of sentiment the advantage changes sides. Once everyone is positioned the same way there is nobody left to buy, and a small impulse is enough to turn the move around. That is an observation about crowd behaviour, not a ready-made entry signal.

Here is the misunderstanding worth clearing up, because half the internet repeats it. The CNN Fear & Greed Index measures sentiment on the US stock market; it is built from seven equity-market indicators such as market breadth, demand for lower-rated bonds, and the ratio of put options to calls. It is not a currency-market indicator and it says nothing about what EUR/USD will do next. For a trader on the FX market its value is indirect at best: an extreme reading can serve as a rough proxy for global risk appetite, and that does feed through to currencies treated as safe havens, such as the Swiss franc or the yen. Treating a reading above eighty as a sell signal on a currency pair is a misuse of the tool.

Closer to the currency market is the Commitment of Traders report, published weekly by the US regulator, the CFTC, which shows how large participants are positioned in currency futures. But that too arrives with a lag of several days, and it describes extremes of positioning rather than a moment of entry.

Five things that genuinely limit the influence of emotion

None of what follows will stop you feeling fear or elation. The point is different — it is to take away those emotions' right to vote at the moment the decision is made.

1. A plan written down before the click. Entry price, stop-loss level, profit target and position size — all of it recorded before the position exists. After opening you change nothing except, possibly, trailing the stop behind price. The plan is a frame emotions cannot reach, because it was built before they arrived.
2. Accepting the loss in advance. Before you press the button, say it plainly: this position may lose 80 PLN and that is fine. Fear feeds on uncertainty about the scale of the damage, so naming that scale takes away its fuel.
3. A constant position size. The same one to two percent of risk per trade, regardless of what happened yesterday. After five wins you do not increase it; after five losses you do not cut it. How to calculate it is laid out in the piece on the one percent rule per trade.
4. A trailing stop instead of waiting for more. When a position is in profit, rather than holding it "until something happens", move the stop loss along behind price. That is greed managed mechanically: you keep the potential for a further move, but part of the profit is locked in without any decision from you.
5. A journal with a column for emotion. Next to the entry price and the result, write one sentence about what you felt before the click. After a quarter you will see that your worst decisions cluster in recurring states — and you will be able to recognise them before they decide for you again. More on building that kind of system is in the piece on discipline that works once motivation is gone.

It is worth keeping the scale of the problem in mind as well. Brokers operating in the European Union are required to publish the share of retail accounts that lose money; for most of them it sits roughly between seventy and ninety percent. Not every one of those accounts lost through emotion, but it is hard to name a second factor that turns a sound plan into a poor result quite so consistently.

What to do tomorrow

1. Review your last thirty trades for one number. Count how many you closed by hand before reaching the planned profit level even though the market gave no exit signal. If that is more than a third of them, your problem is called fear rather than the accuracy of your method — and that is where the next month of work belongs.
2. Add two columns to your spreadsheet and fill them in daily. The first: one sentence about what you felt just before opening the position. The second: whether the position size was standard or departed from the rule. Two columns are enough to reveal your own pattern after a few weeks, without guesswork and without relying on memory, which likes to retouch.
3. Set one rule for winning runs and pin it above the monitor. For example: after three wins in a row the next position is exactly standard size with a mandatory stop loss placed in the platform. That rule costs you nothing in a good week and saves your month in a bad one.
4. Put the stop loss and the profit target into the platform on every entry. Not "in your head", not "I will watch it" — as pending orders, immediately after opening the position. A level that exists only in your memory is precisely the level that fear or greed will move at the worst possible moment.

Fear and greed do not disappear with experience. A veteran feels them just as a beginner does; the difference is that he has built a structure around himself in which his emotions simply have no say. If you notice the two starting to overlap and the session slipping out of control, stop and check whether you are not already in the state described in the piece on trader tilt and how to get out of it.