The Fear and Greed in Online Trading

May 12, 2010

Fear and greed are the yin and yang of Wall Street. They are the primary opposite and competing forces influencing investors. Yet, each also complements the other, creating a necessary balance that makes the market hum. They swirl inside each of us in an exquisite dance, playing upon the larger unfolding market drama.

We declared that “mind moves the market.” It is what we tell ourselves and what we feel related to the story we tell ourselves about interest rates, the economy, news events, or anything else influencing the market that sway us to be bullish or bearish, buy or sell.

With the typical gyrations of today’s market, what we feel are varying degrees of fear and greed intertwined. Sometimes in the background, other times much more obvious but, to some degree, they are always operating. And, of course, it’s not only today’s markets that are ruled by fear and greed¡ªthe history of all trading and investing of any kind reveals the same psychological story.

With the easy money investors have made from the raging bull market of the last decade, expectations of return on investment have gone up. Anything less than a 20 percent return per year is viewed as inadequate. These higher expectations are a form of greed. And, as our collective greed has become stronger, so has our fear of losing what has been gained. When there is more money on the line, both fear and greed increase in strength.

The initial public offerings of Internet companies the last few years brought the frenzy to a head. Stratospheric gains were made, virtually overnight, on the new “dot-com” companies, the likes of which the market had never before seen.

Witnessing moves of 30, 40, or 50 or more points up in one day in a single stock simply was mind-blowing to everyone on Wall Street. Growing numbers of investors wanted to mine for gold themselves, as they heard friends and associates boast of their newly earned riches.

These volatile stocks are still the day trader’s delight. It is not so surprising to learn that up to 80 percent of day trading volume is centered on Internet stocks. The “mo-mo” contingent (momentum traders) couldn’t live without them. Interestingly, it is the at-home day trader who most favors these stocks, as many day traders at trading firms tend to be more conservative, favoring “old-tech” stocks like Dell and Cisco.

One of the tasks of the online investor is to come to grips with¡ªand even try to master¡ªthis interplay of personal fear and greed. Sometimes we may experience them very closely linked, along with their associated thoughts. At other times, sucked into the vortex of one force or the other, we experience them as worlds apart.