Role of Emotion and Greed in Intraday Trading

Greed's Influence:-

So often, investors get caught up in greed (excessive desire). After all, most of us have a desire to acquire as much wealth as possible in the shortest amount of time.

The internet boom of the late 1990s is a perfect example. At the time, it seemed all an advisor had to do was simply pitch any investment with a "dot-com" at the end of it, and investors leaped at the opportunity. Buying activity in internet-related stocks, many just startups, reached a fever pitch. Investors got greedy, fueling further greed and leading to securities being grossly overpriced, which created a bubble. It burst in mid-2000 and kept leading indexes depressed through 2001.

This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term, especially amid such frenzy, or as the former Federal Reserve chairma
Alan Greenspan put it, the "irrational exuberance" of the overall market. It's times like these when it is crucial to maintain an even keel and stick to the fundamentals of investing, such as maintaining a long-term horizon, dollar-cost averaging and avoiding getting swept up in the latest craze.

Fear's Influence:-

Just as the market can become overwhelmed with greed, the same can happen with fear ("an unpleasant, often strong emotion, of anticipation or awareness of danger"). When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy.

Just as greed dominated the market during the dot-com boom, the same can be said of the prevalence of fear following its bust. In a bid to stem their losses, investors quickly moved out of the equity (stock) markets in search of less risky buys. Money poured into money market securities, stable value funds and principal-protected funds—all low-risk and low-retu
securities.

This mass exodus out of the stock market shows a complete disregard for a long-term investing plan based on fundamentals. Investors threw their plans out the window because they were scared, overrun by a fear of sustaining further losses. Granted, losing a large portion of your equity portfolio's worth is a tough pill to swallow, but even harder to digest is the thought that the new instruments that initially received the inflows have very little chance of ever rebuilding that wealth.

Just as scrapping your investment plan to hop on the latest get-rich-quick investment can tear a large hole in your portfolio, so too can getting swept up in the prevailing fear of the overall market by switching to low-risk, low-retu
investments.

The Bottom Line:-

You are the final decision-maker for your portfolio, and thus responsible for any gains or losses in your investments. Sticking to sound investment decisions while controlling your emotions, whether greed or fear, and not blindly following market sentiment is crucial to successful investing and maintaining your long-term strategy. But beware: Never wavering from an investment strategy during times of high emotions in the market can also spell disaster. It's a balancing act that requires you to keep your wits about you.