I want to cover the concept of fear as well as greed. These to forces really oppose one another. When the market is in fear, the market is usually tanking and going down. When the market is in a greed state the market is skyrocketing or going up.
So these two forces are always going back and forth. People talk about fear versus greed but really it comes down to the psychological part of the fear and the greed.
Looking at the fear and the greed
I like to look at fear and greed in terms of spectrums. Spectrums are just a nice linear way to look at things. So it can be a simple line and on one side you have fear and on the other side you have greed. If we talk about it in a different way for example love and hate or it could be looked at in terms of black versus white and in the middle you would have gray.
When we have fear and greed in the market you basically have the market being on one side or the other because the market is not in balance. The market is usually shifting towards one end or the other. So it is either going up a few points, down a few points then when it goes too far towards one side it will balance back out to the other side having a seesaw effect.
The problem with this is that when the market is in perfect harmony the market does not move. But you will only see this very rarely. Usually this does not happen. Usually the market will move up or down at least one point. I do not believe that the market has ever opened at one price and closed at that exact same price because for that to happen no trades would have taken place.
Over confidence and under confidence
So the market is always not in a balanced state and for that reason, if you take it along the spectrum, with the fear on one side and the greed on the other if you turn the fear into a psychological concept, the fear is really a lack of confidence whereas the greed is actually over confidence.
These two parts are always playing with one another and the market is trying to balance each of those out. So if we had things in perfect harmony, the market would not move but again, that does not usually happen. So we are always battling fear versus greed.
This is just a concept for you to think about and switch your thinking around just a little bit when the market starts shifting in one way or the other. A lot of people discuss the fear and the greed but they do not discuss how it applies but as you start digging deeper and start looking into yourself, you will see how you are feeling towards the fear or the greed. This will help you determine if you are more in the over confident side or are you more in the state of a lack of confidence.
As you start looking at those pieces and positioning yourself on the spectrum of fear versus greed, you will be able to understand which one you need more of. If you are too fearful, you are going to need more confidence. On the other hand if you are too greedy, you need to get a little less confidence so that you are in well-being.
When you are in well-being or when Yin and Yang is in perfect harmony you are balanced. That usually works out much better when you are trading. Otherwise you may take a huge dive on your portfolio and disastrous things can happen.