Even people who have just entered the trading world quickly notice something interesting – when prices start falling they seem to do it really quickly, almost like falling from a tall cliff. Upward momentum on the other hand is quite often at a steady and moderate pace. There are exceptions of course but this does happen more often than not.
The answer to the question why this happens lies within our minds. Namely the fear and greed we experience.
There’s always a certain amount of fear when you sell something, regardless if it’s at a profit or loss. Its collective manifestation, when many people start feeling it, can be explained by its primal nature and because it developed in our brains before greed. Scarcity was there before abundance for our species. It helped us survive by allowing us to calculate risks and adjust our behavior to gain the maximum reward.
Greed is on the flipside when it comes to trading. We actually discuss it in detail in our Elliott Wave tutorial but to put in a few words – it’s what drives upward momentum. It’s a secondary emotion in terms of evolution and acts in a different way. More accumulation needs to happen before it presents itself.
One thing that can show you increased levels of fear are volume levels – when an instrument is crashing it happens with higher volumes. Because it’s stronger, fear works quickly and makes us feel like there is only one to go – lowering fear by lowering or exiting entirely from a position. It’s a reaction to the stress a trader feels during the trading process.
There’s one vital point that has to be taken into account. FOREX is NOT an example of sharp drops and rises. Because we always trade pairs, a downward move for the first one equals an up move in the second one (and vice versa).
Here are our four tips about using these emotions to your advantage in an Elliott Wave context:
- Always remember that you can make money in both directions of the price – big turns happen both up and down in trading. Riding the waves of an Elliott Wave analysis, depending on the time frame of course is one way to do it.
- Do a bit of introspection before you open a trade, try to see if greed or fear are driving you to enter it. Also try to measure it, too much enthusiasm and emotional attachment can cloud decisions.
- Use stop loss orders. Always. We discuss where to place them in the Elliott Wave course.
- Be patient when buying and alert when selling. The former might take more time than you thought to become a winning position, while the latter needs attention because it can develop extremely fast.