😲💵 About Fear and Greed in Trading

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AriaS

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Let's start with the fear. If we fear losing, this means one of two things:

  1. We are not sure that our strategy is profitable. We are scared. If we are sure that our strategy is profitable, because we backtested it in-sample and out-of-sample, compared live trading to backtests, etc., why would we fear?
  2. Our strategy is profitable, but we are trading too aggressively—risking too much. If we don’t want to live in fear, we won’t risk more than what makes us feel comfortable enough.

Now to the greed. It is the opposite side of fear. If we feel greed, this means one of two things:

  1. We know that our strategy is profitable, but we want more money, so we break the rules of our own strategy (add trades, close trades etc). We don’t know that we will actually make more money this way, because we haven’t backtested these actions.
  2. We let our strategy risk too low, because we fear losing (see about fear)
End of story.
 
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