Lesson 6. Fear and Greed in Binary Options Trading

Fear and greed are two feelings that rule financial markets. Human nature influences the behavior of investors, forcing them to do thoughtless and even crazy things. In the sixth lesson, we will review the topic of premature profit-taking and try to find ways to handle the most harmful emotions in trading.

Lesson Topics:

1. Premature closing of positions
2. Fear in trading
3. How to maintain emotional distance
4. The psychology of greed
5. Curbing greed

Premature Closing of Positions

Refusal of profit-taking requires people to have tremendous self-discipline, since it forces them to act contrary to their nature. Your mentality will always find an original excuse for why you need to quickly close a position that has become profitable. As a result, not all possible profits are realized and the efficiency of the transaction turns out to be low.

You probably know these proverbs:

• A penny saved is a penny earned.
• A bird in the hand is worth two in the bush.
• Greed is a bad adviser.

Over the years of evolution, people have developed a natural reflex for quick profit-taking. Your brain automatically returns to proven behavioral mechanisms without even thinking about it. The desire for immediate reward is controlled by the release of dopamine, a neurotransmitter commonly referred to as the hormone of happiness.

Fear Is a Bad Adviser

The list of possible reasons for premature position closing can be continued indefinitely. All of them, first of all, testify to one thing: people are mortally afraid of losing their earned profit.

The problem is that you don't have confidence in your strategy. You have tunnel vision and focus only on how much money you can earn or lose from a particular transaction. Every price movement is interpreted as a potential danger or threat. If something like this happened to you, it means that you have been captured by your emotions and no longer understand what is happening in the market.

From a psychological point of view, you are not so much worried about a particular transaction, while your ego identifies with these fears. It harms the emotional balance.

When you feel similar feelings, you should take a break. Take a deep breath and try to calm down. Physical exercises and meditation are good ways to relieve stress. Having restored emotional balance, you will think more rationally and will be able to complete the planned transaction in line with your trading strategy.

Emotional Distance

By following these principles, you will be able to take a better control over your emotions and act more objectively:

• Determine the profit target for each transaction in advance.
• React only to market changes, not on individual positions.
• Focus on the profitability of the entire portfolio, not on individual transactions.

You can control your subjective concerns about the outcomes of individual transactions by maintaining a neutral observer’s position. Clear price targets will help you remain calm and not make hasty decisions. If you feel that you are starting to think about the profits or losses of individual transactions, take a
break and try to emotionally distance yourself. Think about what resulted in the concentration loss or distracted you from the market situation.

Ask yourself the following questions:

• Are you afraid of not recovering from individual losses?
• Do you feel excited about the prospect of making high profits?
• Are you afraid of missing out on potential profits?

The uncertainty about the outcome of a transaction which has already become profitable can only be overcome by those who have full confidence in their strategy.

The Psychology of Greed

Greed is an uncontrollable desire to get more: more property, more money, more success, more fame. From an evolutionary point of view, it is a very useful trait. After all, without the desire to find as much food as possible and reproduce, humanity would not have survived. Greed also has other advantages:

• Greed helps to overcome obstacles and fears.
• Greed increases the willingness to take risks.
• Greed makes people curious and increases the thirst for knowledge.

Nevertheless, we do not live in the Stone Age. Money and the stock market are the product of the modern era. The human brain was born at a completely different time. It was not designed for rational investment, nor in particular with regard to short-term trading.

Unfortunately, greed in trading usually leads to a number of negative consequences:

• Greed forces traders to take too many risks.
• Greed leads to excessive self-confidence and losing control over the situation.
• Greed leads to over-trading and revanchist trading (the desire to recover).
• Greed prevents you from learning from your mistakes.
• Greed is the cause of market excesses and speculative “bubbles.”

Neurobiological research shows that when you earn easily, there are many more hormones of happiness in your body compared to what can be earned by a salary. Perhaps that is why traders often experience emotional outbursts.

Along with fear, greed is one of the two most dangerous emotions when it comes to trading binary options. In fact, greed can be considered as another form of fear, which is the fear of not getting enough money. The trader gets afraid of losing profit and takes it prematurely.

Through our consciousness, we are consolidating and strengthening the way in which we behave all the time. If one acts based on fear, his fear increases. If his actions are based on frustration, it gets worse. Is it any wonder that too timid traders never feel confident in their actions?

It is important to use all existing opportunities to make a profit. You should strive to make the most of the transactions in order to be profitable. Otherwise, you simply will not be able to earn on trading, because even the most experienced traders rarely have more than 60% of winning transactions.

It's difficult to control the natural and deeply ingrained in our subconscious reflex to make quick profits. Therefore, it is important to clearly define the targets for each transaction and keep an emotional distance.

How to Overcome Greed?

It is boring for our brain to follow the rules. Subconsciously, you look for risk and adrenaline rush. Dopamine is addictive, and the brain craves reward. People react to a quick profit in the same way as to drugs or sex.

First of all, our brains react to potential profits, not to the money itself, but to the possibility of receiving it. It is the expectation of reward that results in neural fireworks and dopamine release in the brain. It causes a physical and mental reaction that encourages us to take risks.

Soon after the transaction actually gets profitable, dopamine levels gradually return to normal. The brain begins to act rationally again, and the fear of loss takes over. It encourages traders to make smaller profits instead of sticking to the strategy.

It is difficult to determine at what point you were trading consciously, and at what point you went on about greed. The following simple recommendations will allow you to better assess your condition:

1. Study your transactions. Analyze both negative and positive transactions in your trading diary. That way, you'd be able to figure out more accurately how emotional you were in the course of trading.
2. Observe your emotional state. If you feel passion or excitement during trading, take a break until your emotional state returns to normal.
3. Stay skeptical. The situation on the binary options market may change at any moment. Do not rush to open transactions without preliminary analysis, even if they seem very attractive at first.
4. Relieve stress timely. Relieve tension in order to make decisions based on the real market situation, and not on feelings.
5. Set real targets for yourself. Don't try to earn all the money in the world. You are unlikely to be able to increase your capital overnight. According to Pocket Option statistics, successful binary options traders earn about 50% of the deposit on average. Focus on this amount.
6. Don't trade more than you need to. If you find yourself spending too much time on the trading platform, trying to maximize your profit, you are probably driven by greed.
7. Treat trading like a marathon. As they say, you can drive longer at slower speeds. Stability in binary options is more important than profit.
8. Keep track of the size of your transactions. If you start to increase the position’s amount after several losses, it means that your emotional state is unstable.

Remember the rules of your own trading system and stick to the strategy. Gain experience in the Pocket Option demo account or other trading simulators to learn how to suppress fear and greed and start earning regularly on binary options.

Summary

Neurotransmitter involves chemical molecules that ensure the transmission of messages from one neuron to another in synapses.

Dopamine is a neurotransmitter and an element of the reward system that pushes people to certain actions.