Fear and Greed in the Financial Markets

Have you ever heard that fear and greed are what drives financial markets? Well it’s true. It’s been shown that the best times to buy stocks are often when it seems everybody else is most afraid to, and that the best times to sell stocks are often when it seems everybody else wants to own them, and is happiest about how much money they have been making in the market. The problem is that this is often very hard to do, and psychologically difficult to actually take action at these times. The reason is primarily due to human emotions and the role they play in making decisions that create anxiety for most people, specifically when it comes to their finances and the money they have at risk in the financial markets.
In addition to “going against the crowd” when attempting to buy when others are afraid, other sayings abound such as “don’t try to catch a falling knife”, etc. that intimidate people into going against “conventional wisdom”, and not “going against the grain”.
Fortunately, as we all have seen, financial markets behave very similar to other principles found in numerous examples in nature – like the tides for example, which can only go in and out so far, or like a pendulum that can only swing so far in one direction before momentum stalls and it will begin to swing in the other direction. Financial markets will always eventually begin to move in the opposite direction after some time, when these extremes are reached and can be identified.
Knowing this, what if there was a trading system that could show you exactly when to buy and sell in these situations because you have been able to identify, with proven historical accuracy, when the probability that markets will continue to rise or fall has gotten to a minimum? This knowledge could in turn give you a high comfort level in following through with your decision to buy when fear had reached an extreme, and to sell when greed had reached the other extreme.
This type of system should be able to help you identify market extremes, similar to being able to predict how far the tide will go out before it starts to come back in, or how far a pendulum will swing in one direction before it starts to swing in the other. In this manner, no matter how far markets have risen or fallen, one can with a reasonable degree of accuracy, identify when markets should be about to turn in the other direction.
If one is able to make this determination, one can then apply this information by executing any one a number of different trading strategies to take advantage of the upcoming expected market move. These strategies include buying ETFs, index funds, options on indexes (directional strategies) that will profit with a move in the expected direction, and/or selling credit spreads on stocks or indexes (non-directional strategies) that will profit with a move of the underlying stock or index in the opposite expected direction.
Have you ever been frustrated by seemingly always buying and selling at the wrong times when investing and/or trading in the stock market? Chances are it has been because of peaks in fear and greed. A successful trading system should be able to confidently identify, and profit from, peaks in fear and greed in the financial markets.