Successful traders know that the markets are driven by fear and greed

There is a saying in financial circles that stock markets are driven by two emotions – fear and greed. Whilst this might be an over simplification, these are two of the biggest psychological effects of investing and both of them become very apparent during volatile markets.

Most of us want to make as much money as possible in the shortest period of time. When the market starts to climb steadily the emotion of greed starts to take over.
As the good news and rising markets continue, investors become over confident and often assume that the good times will continue unabated.
This irrational exuberance will result in over inflated markets and stock bubbles which will burst at some stage.

Just as a market can become overwhelmed by greed the same can happen with fear. When markets suffer large losses for a sustained period of time, the overall market can become fearful of making further losses.
The “get rich” mentality is a very enticing proposition to envisage but it is important to follow sound fundamental investment principle such as the following:

Know how much money you can afford to lose by being exposed to the share market.
Take a long term view on shares.
Avoid getting caught up in the dominant market sentiment of the day which is often driven by fear and greed.

It is important to understand the effect that our emotions have on our investment decisions.