The Psychology of Risk, Fear and Greed in Intraday Trading

Intraday trading, or day trading, refers to the practice of buying and selling financial securities within the same trading day. It aims to profit from short-term price movements over periods ranging from a few minutes to hours. While day trading presents opportunities to make quick profits, it also involves substantial risks that can elicit intense emotions like fear and greed in traders. An understanding of the psychology behind these emotions can help traders via free trading account manage them better for improved trading performance.

The Risks and Learning Curve Associated with Day Trading

The combination of risks arising from leverage, short-term volatility, and short holding periods of positions requires day traders to make decisions under tremendous pressure while dealing with elevated probabilities of losses from reversals or margin calls. These decisions require reacting fast to incremental price movements while also accounting for transaction costs on a real-time basis since a high volume of trades characterize intraday trading. Hence, making consistently profitable decisions requires specialized skills backed by continuous screen time, trading experience, and nervy composure.

Without adequate competencies, skills, and ice-cool temperaments to counter the above risks, intraday trading amounts to little more than gambling on minute-to-minute market randomness. The profession hence carries a very steep learning curve and its risks claim many novice traders before they gain enough skills, discipline, and emotional stability to day trade profitably. Various surveys over the years have indicated that 70% to 90% of new day traders fail in their first 1-2 years of trading with most wiping out their entire capital.

The extreme risks and learning curve pressures of day trading fuel psychological pressures leading novice traders to commit errors arising from fear of losses or greed for profits. Until substantial skills and ice-cool temperaments get ingrained through screen time and trading experience, these emotions can come to dominate trading behaviors instead of strategic rationality.

Fear of Losses in Trading

The most prominent psychological pressure experienced by traders involves fear centered around incurring losses, or in other words – risk aversion. Loss aversion is a deeply ingrained human trait where people prefer avoiding possible losses instead of acquiring equivalent gains when presented with a risk-related choice. For traders, loss aversion surfaces as the fear of losses which can reach intense levels owing to real-time portfolio fluctuations on an intraday basis, amplified by leverage risks.

There are several dimensions to how fear of losses plays out in intraday trading: –

For novice traders still honing their skills, volatility poses constant threats of stop loss triggers leading to actual crystallization of open losses. Repeated stop losses produce a fear conditioning where past memories of accumulated losses make traders subconsciously adverse to losses. Any drop in open position value sparks fearful emotions which induce hasty exits even from potentially profitable trades to avoid further losses. Other times, fear prompts overtrading where fresh positions get opened irrationally in hopes of covering accumulating losses quickly without waiting for redemptions from existing trades.

Greed and Overconfidence Biases among Traders

At the opposite end of fear lies greed rooted in the innate human tendency toward risk-seeking in contexts perceived to carry opportunities for gains. Just like losses, gain potential also incites intense emotions. In trading, volatile market swings present regular opportunities for quick profits which fuels greed biases focused exclusively on maximizing gains while ignoring accompanying risks.

Greed generally surfaces after a series of winning trades or significant profits accumulated in a short period like a single trading session. This conditions traders into a euphoric expectancy of further easy profits. Such greed biases cause deviations from tested trading strategies as prudent risk management gets ignored in favor of craving ever higher profits through impulsive actions like:

  • Overtrading by opening more positions due to overconfidence about one’s current winning streak and market reading
  • Refusing to book profits at pre-determined technical trigger points or desired profit levels hoping for further upside in open profit
  • Averaging down losing trades with addition of capital beyond pre-set limits hoping for a reversal even as losses accumulate
  • Opening unhedged positions with concentrated exposure to maximize gains from current market directional bias

The Dangers of Fear and Greed for Trading Performance

While moderate amounts of fear and greed are inevitable challenges for developing trading proficiency, unchecked strong reactions to these emotions are severely detrimental for performance consistency. Both fear and greed share certain behavioral implications that feed off each other to fuel a damaging vicious cycle: –

Emotional Reactivity Impedes Skill Application: Strong episodic reactions to fear or greed triggers physiological changes like accelerated heart rate, sweaty palms, and adrenaline rushes which impact cognitive faculties. Trading skillfully requires processing quantitative and graphical data, identifying emergent patterns and calculating contextual statistical probabilities regarding favorable outcomes. Such complex analytical abilities require calm composure. Emotional arousal or distress severely impairs these rational faculties causing analytical lapses. Traders hence fail to utilize their very skills and training when most necessary out of reactivity to volatile price action.

Impulsive Actions Circumvent Planning: Emotions compel urgent reactions rather than purposeful actions. Instead of a measured response using structured trading frameworks, emotional turbulence prompts impulsive actions centered around Primitive risk avoidance or risk-seeking urges. Such spontaneous reactions always ignore planning. Disciplined adherence to trading rules which represents the very basis of tested strategies gets relegated when emotions run high so traders end up acting whimsically.

Failure To Accept Uncertainty: Trading outcomes carry intrinsic uncertainty because assaying probabilities, not predictions is the realistic purpose of market analysis. Emotions stem from inability to accept this uncertainty which manifests in fearing unavoidable losses or getting carried away with temporary winning streaks. Such emotional extremes grow out of unrealistic expectations of certainty about profits or losses. This denial of trading realities diminishes analytical reliability and planning effectiveness.

Battling Fear and Greed Through Disciplined Trading Habits

While some degree of emotional reactivity may be unavoidable for novice traders, veterans mitigate destructive impacts through rigorous self-regulation and trading discipline. Robust Learn trading discipline aims to reinforce rational faculties and skill application even amid emotional chaos through three essential pillars:

Preparation of Written Trading Plans: Meticulously charted trading plans are vital for first anchoring trade execution in empirical data points instead of emotional whims. Trading plans should outline strategic guiding norms for key aspects like position sizing,

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