Fear and greed are the two most powerful emotions that drive prices in any market. Unfortunately, many traders let their emotions get the best of them and end up going down the drain.
We've all heard tales of top traders hitting rock bottom after a trade goes south, all because of trading greed. Greed in trading can turn profitable trades into losing ones and losing trades into blowing up one’s trading account.
But, successful traders know how to keep a cool head and handle the ups and downs of the market.
So, how do they balance greed and trading?
How to deal with greed when trading and stay on track?
Well, buckle up because we're about to explore just that! From limiting the number of trades you take to setting lower trade sizes, we've got you covered with 5 proven strategies for dealing with trading greed.
Here's a quick preview: controlling emotions is key, and it starts with recognizing when greed is taking over. From there, it's about finding ways to stay focused, avoiding impulsive decisions, and having a plan for when things go south.
Sounds good?
Let's get started!
What Is Greed In Trading?
Cambridge Dictionary describes greed as “a very strong wish to continuously get more of something, especially money.”
The burning desire for more profits and the urge to make a quick buck has been experienced by all traders. But, if we're not careful, this "more is better" mentality can lead us down a dangerous path.
Sure, fear can freeze you up and keep you from making trades, but at least your money stays put. But, greed pushes you to act irrationally, making hasty decisions and taking on more risks than you can handle.
What Are Examples Of Greed In Trading?
These are the most common signs of greed in trading:
Overleveraging
Doubling down on a losing position
Chasing the price
So, the question is, how do we keep greed in trading in check? How do we keep our heads on straight and avoid the dangerous "more is better" trap?
Well, that's what we're here to explore. With the right strategies in place, we can steer clear of the greed monster and trade with confidence.
Real Example Of How Greed Affects Trading
Let’s picture the following scenario of a trader who consistently beats the market and is riding a hot streak of profitable trades. The trader becomes greedy, thinking they are invincible and can do no wrong. They start to take on more risk, over-leveraging their positions and making impulsive trades based on gut instincts.
A new trading opportunity shows up on GBPUSD, which is bouncing off the 200-day moving average. The price moves higher and the trader continues to add more longs.
When the BOE dropped a surprise comment and sent GBPUSD below the 200-day moving average, the trader found themselves in a losing position.
But instead of cutting their losses, greed took over and they doubled down, hoping to turn the situation around. Unfortunately, the market had other plans, and the trader was left with a big loss.
This is a cautionary tale of how greed affects trading, tempting traders to make impulsive decisions that can ultimately lead to financial ruin.
The moral of the story?
Always keep your emotions in check and never let greed cloud your judgment.
How To Control Greed In Trading?
Having a trading journal, or doing slow breathing exercises is all good but it won’t do much in helping to control greed in trading. Instead, here are 5 proven techniques on how to control greed in trading:
Withdraw Profits Regularly
Withdrawing profits regularly is a must for any trader looking to tackle trading greed. Setting daily, weekly, or monthly profit targets and withdrawing whatever you need to satisfy your need of making money.
After all, the goal of trading is to make money and put it in your pocket. Sure, it may sound greedy, but that's the whole point, right? You take risks in the market for potential rewards. And just like any other business, it's important to pay yourself.
Small payouts are just as good as big ones. Don't be afraid to withdraw $1,000 in profits or $10,000. The key is to pay yourself often.
Not only will this help keep your motivation high, but it will also remind you of why you started trading in the first place.
Limit Your Trading
"Too much of a good thing" can be true in trading too!
When greed takes over and you start placing trades left and right, it's time to hit the brakes and limit yourself. Stick to your average number of trades and avoid the temptation to overtrading. Remember, the goal is to make smart, calculated moves in the market, not just make as many trades as possible.
Manage Your Risk And Lower Trade Size
Greed often leads traders to risk everything on a single trade. If you aim for quick riches, you'll end up blowing your account.
Imagine you're risking 10% or 20% of your account balance on each trade. You might win a couple and double your balance, but eventually, you'll lose one and lose everything.
But let’s flip the tables!
Now, what if you still aim to make double your risk, but only risk 0.5% per trade?
Let's say you place 20 trades in a week and get half of them right – 10 winners and 10 losers. With a modest $10,000 balance, that's only a return of $100 a week. Imagine what the power of compounding can do to your return over a year.
10,000 x 1.005^52 = $13,428
That's a return of over 1242% without ever risking more than 0.5%. And just imagine the returns in the following year!
Don't try to get rich overnight. Patience is key if you want to satisfy your greed in the long run.
Managing Stress
Managing stress is crucial to tackling trading greed. The intense emotions that come with trading can quickly cloud your decision-making process. When you're in a state of stress, your mind is preoccupied and you can no longer see the market clearly
So, it's crucial to have a healthy way to deal with stress, whether it be through exercise, meditation, or simply taking a break.
Stick to your Profit Target Levels
When greed takes over, it's all too easy to get tempted to adjust your targets on a whim, seeking ever-greater profits. This can be a slippery slope, leading you down a path of making impulsive and irrational decisions.
So, if you want to succeed in the markets, it's crucial to set profit targets and stick to them. Don't be tempted to adjust your goals in response to short-term gains or losses.
Final Thoughts
Greed is a common emotion that affects many traders and can lead to impulsive decisions that result in significant losses. To avoid this, it's important to be mindful of your emotions and develop strategies to manage them.
The five ways to deal with trading greed, including managing risk and trade size, withdrawing profits regularly, limiting trades, managing stress, and sticking to profit target levels, provide a strong foundation for traders to maintain control of their emotions and make rational decisions.
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