Emotional Trading: overcoming Greed
In the world of trading, success is universally measured through the amount of money in one’s trading account. Score is kept in dollars and cents, thus greed in active trading is centered on the accumulation of hard currency. Forex is quite attractive for many people because of its potential to make a good profit and the ability to be your own boss. But the question that lingers in a trader’s mind when he or she starts to trade is usually this: ‘How much money can I make and how quickly can I make it?’
If you want to be a successful trader, greed is probably the biggest obstacle you will have to overcome. … New traders and their accounts have suffered because of greed. In fact, this is how the saying “Bulls and Bears make money; “Pigs get slaughtered” the markets show no mercy to greedy traders and that is very true.
Greed is a determinant of a wide variety of practices that are detrimental to profitable trading. A few of the most common pitfalls are:
- Overtrading: Overtrading can be attributed to greed in that the desire to make money encourages taking trades that are outside of the adopted methodology. Impulsive trading is often the result, with the trader ignoring pre-set rules in favor of chasing profit or making up for losses.
- Aggressive risk taking: In order to make more money and satisfy greed, a trader may adopt risk parameters that exceed available resources. Taking abnormally large positions and engaging in reckless money management practices are common issues associated with greed.
- Inability to define profit and loss: Profit and loss are key elements of money management that must be defined before each trade is taken. Greed makes this difficult, because the profit targets are often unreasonable and the realization of a loss delays the instant gratification that a winning trade provides. The result is the tendency to exhibit indecision when taking profits, and reluctance in exiting losing trades. Holding on to a losing position for too long, lowering stop losses all the time, and the hope that the market will reverse is a position a consistently profitable trader will seldom be in.
When excessive greed conquers your mind, you fail to think about the consequences that your actions will bring. But when you really end up facing the negative consequences, it makes things worse and causes a further emotional breakdown. If greed is left unmanaged and remains part of a trader’s psyche, periods of sustained success can lead to a feeling of trade-related euphoria, as feelings of overconfidence can lead to aggressive risk taking and hyper-aggressive trade selection.
The influence that greed and euphoria have upon a trader’s psyche can be substantial and harmful to a healthy trading mindset. The task of managing these issues must be honestly addressed in order to overcome the challenges they pose to profitability.