Understanding Greed As a Trader

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Understanding Greed As a Trader

The Swiss proverb says, “ Greed is the most dangerous emotion.” This is very true for most traders. It is an undeniable fact that a lot of traders have suffered a lot due to greed. This is actually were the famous trading saying “Bulls and Bears make Money and Hogs get slaughtered” came from. Hogs are the greediest of the animals an in trading there is no mercy for traders who embodies hogs. Because of the risk for people falling into the pit of greed, it is pretty much ideal to understand what it truly is.

WHAT IS GREED?

Common dictionaries describe greed as a selfish and extreme longing for more of anything (including money) than what is needed or necessary. This sounds familiar right? Yes, many of us are guilty of being greedy. It is our longing to get more returns that push us to trade and such desire is no longer healthy and then become dangerous when done excessively. This is why it is often deemed as a very dangerous emotion for anyone involved with trading. This is considered as something worse than fear. Fear paralyzes you and keeps you away from trading however; you still have your capital preserved just as long as your hands are in your pocket. On the contrary, greed lures you towards acting in times and even in ways that are not good. This is why greed is dangerous.

WHAT ARE DANGERS OF GREED?

Greed can let you act in an irrational way. As a trading greed may come on various ways including, overtrading, market chasing, and over leveraging. These are things that you should exit once you know it is happening to you already. As a matter of fact, greed is similar to alcohol and drugs. It allows you to do foolish things especially when you have too much already. When greed has already clouded trading judgment, it is then that you are drunk with it.

HOW TO OVERCOME IT?

Just like other necessary gestures, conquering greed needs more discipline and effort. It is not that easy but overcoming it is possible. It’s just about how to tame the ego. You need to accept your fault and admit that every call is not always right. There are times when you cannot grasp the full move of the market. There are also times when you will miss out on a good set up.

FINALE

This is how trading is. The moment you learn how to accept that you are smaller than the market and that you will surely commit errors, it is by then that you can be more focused on following your plans and not submitting to greed. Many successful traders believe that it is better to be lucky rather than simply be good. For these traders, it is better to depend on luck rather than trust on their capabilities. This is not good for the ego, but it is great for the trading psyche. Don’t let trading be a blame game because of greed but rather make it a thinking an analysis game.

Greed: A trader’s nemesis | How to overcome it?

Greed is the worst enemy of all in Forex trading. It is time to look into ways that can help you to defeat this enemy whenever it surfaces. The first step in doing that is understanding how Forex works and fully comprehending the reality of it. Once this understanding is clear as daylight in your mind, greed will gradually lose its power. In the subsequent articles, we will also discuss some additional ways to manage greed in forex trading.

Forex Market is bigger than you think

The forex market is so huge and you are just one of the million of traders who are trading Forex. What does this indicate? This means mistakes are bound to happen and there will be losses along the way. Accepting this as a normal, can actually help you to remain calm after losses and be careful when you execute your trades.

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When greed drives your decision, you forget this reality. If you have seen some consecutive profits, the euphoria of winning can make you crave for more and you may temporarily forget that the master is a lot bigger than you. It gives you a false sense of control and makes you be less careful.
So, fix this thought in your mind: There is no way for you to be right every time. Even the most experienced, the most skilled and the richest Forex trader cannot be right at all time.

The Greed to be Right

In the post about fear, we said that one of the fears is the fear of being wrong. The other side of the same coin would be the greed to be right. So, greed doesn’t have to be always about money.

Have you heard of the expression ‘Better lucky than good’? Forex trading certainly isn’t gambling and becoming more skillful is always a possibility. But, there is a good secret to handle the greed to be always right. It is to attribute your successful trades to luck rather than attributing it with your own skill. Your skill is directly linked to your self-image; the desire to be always right is linked to your self-image too! So, attributing your success to luck is really good for your psyche and helps you to reduce your greed to be right.

Organize a system

When you have a good trading plan and trading discipline, it is difficult for greed to take over your mind. So, it is always advisable to have a concrete trading plan and develop a good discipline in trading. This discipline also includes good risk management too. If you make it a practice to not to risk more than 2% of your capital and stick with it, then greed cannot touch you that easily.

Make sure you are always conscious of how greed influences your decisions. When you bring more awareness to your thoughts and emotions, you can see very clearly when greed creeps in. As you remind yourself how detrimental greed can be in Forex trading, it will slowly fade away.

How to Master Trading Psychology: Controlling Greed, Fear, and Regret

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Trading psychology is a variable that all traders—regardless of their preferred markets or trading objectives—will need to actively pay attention to. Even if a trader is highly reliant on hard numbers or technical indicators in order to make their decisions, the relevance of trading psychology should not be overlooked.

Trading psychology, as the term implies, can be defined as “the emotions and mental state that help dictate success or failure in trading securities.” Generally speaking, there are three different emotions that can influence a trader’s decision-making process. These emotions include fear, greed, and regret.

The effects of trading psychology can cause traders to exit trades too early and miss out on potential profits. Trading psychology can cause traders to hold a position for far too long and end up losing more than is necessary. At the same time, under the right circumstances, the effects of trading psychology can actually be beneficial.

In this article, we will discuss the most important things to think about when addressing the effects of trading psychology. By actively accounting for every variable that may be affecting your trading performance, you can develop a powerful trading strategy that will help you achieve your financial goals.

Understanding Greed, Fear, and Regret

On Wall Street, greed often causes traders to hold long positions and try to keep earning money. During bullish market conditions (like we witnessed in most of 2020), traders that are greedy and have higher risk tolerances will generally be able to earn more money. However, there are also plenty of times when greed is undeniably a bad thing. If the market is declining, traders that refuse to cut their losses will end up holding highly untenable positions.

Fear, generally speaking, is the exact opposite of greed. If a stock has begun to experience some minor losses, a fearful trader might decide to immediately “jump ship.” They may even exit early during market rallies, knowing that, eventually, the market will begin to slow down. While fear empowers some traders to control their exposure to risk—something that can be quite beneficial when markets are generally bearish—fear also limits a given portfolio’s earning potential.

Lastly, regret is a hazard that all traders will need to account for. Regret—known as the “fear of missing out” and various other names—will often push traders to enter into a position, even after the window of opportunity has already closed. In December 2020, many traders saw Bitcoin had inflated in price to nearly $20,000. Regretting their decision to forego Bitcoin when it was trading under $2, some of these traders decided to heavily invest while the market was at its high point. Had they exercised a value investing strategy, rather than simply looking backwards, these traders could have avoided the 85 percent value loss that inevitably followed.

Passive versus Active Trading Strategies

Most trading strategies can fall into one of two possible categories. Active trading strategies will require traders to identify specific stocks, use various technical indicators, and try to speculate whether individual assets are likely to increase or decrease in value. Passive trading strategies, on the other hand, assume that markets as a whole are generally smarter than any given trader. Passive traders will invest in diversified securities, such as index funds, hedge funds, and other comparable options.

Naturally, active traders are the ones that will need to pay attention to their psychology the most. When a trader begins making several profitable traders in a row, they may be convinced they have a sort of “special touch” that makes them invincible—greed is especially common among high-risk traders. At the same time, traders that are on a losing streak may also allow their fear to cause them to overlook trades they would ordinarily find desirable. Rather than relying on logic and tangible numbers, these traders are governed by their emotions.

Passive traders, while generally protected from some of the effects of trading psychology, will also need to recognize the risks created by their own ego. By trusting the market, they can “power through” potentially intimidating bearish markets. Again, rather than looking backwards and seeing what has happened, these traders will benefit from looking forward and determining what is likely to happen in the future.

Avoiding Risk, Pursuing Strong Returns

In order to develop an effective trading strategy, the first thing a trader will need to do is recognize their personal trading profile. Any trader that hopes to earn stronger returns will need to be willing to take higher risks. At the same time, any trader that hopes to minimize their exposure to risk will need to be willing to accept a lower rate of return on their positions.

Fortunately, there are quite a few things traders can do to address the effects of trading psychology. For example, issue stop orders in advance can help them make decisions before any psychology effects have begun to accumulate. As time goes on, their exit ratios can be adjusted (for example, switching from 2:1 profit to loss to 3:1 profit to loss), but it will still be crucial to issue stop orders, nevertheless.

Adjusting Your Strategy for New Markets and Securities

Trading psychology is present in every market. In high-risk markets (such as penny stocks, cryptocurrency, gold, and various others), allowing greed, fear, and regret to dictate your decisions will be even more tempting than usual.

Traders that hope to effectively manage the impacts of trading psychology will need to rely on objective technical and fundamental indicators when making any decisions. Don’t sell Bitcoin just because you “feel” that it is about to experience a price swing; do it because the Relative Strength Index or Bollinger Bands are indicating this is actually likely to occur. The more you can do to change your trading strategy from a guessing game into a tested science, the more likely you will be able to enjoy consistent results over time.

Conclusion

Trading psychology is a very important part of any long-term trading strategy. Fear, greed, and regret can often cloud our judgment and cause us to make undesirable decisions. However, by actively addressing the effects of trading psychology and taking measures to control them, you can become a successful trader—both in practice and on paper.

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