Psychology or emotions are important concepts in the market. Indeed, most traders who are not able to control their emotions tend to fail.
Stories have been told of excellent traders who sunk into depression because a trade went south. Others have even committed suicide, not only during the most famous crashes.
All successful traders know how to manage their emotions in the market. They know how to remain cheerful even after a series of trades have made losses. At the same time, they know how to manage their joy when they make excellent returns.
Fear and greed in trading
Greed is a complex emotion because it is often connected to many other strong internal feelings and beliefs. The market itself has a reputation for stirring up different emotions. However, that does not instantly help you tell if you are exercising good sense.
Greed can be manifested in several ways in the market. For example, instead of opening small sizes, you could open bigger ones in a bid to make more money. Similarly, instead of using a small amount of leverage, you could use a bigger one since this one exposes you to more profits.
Additionally, greed can be manifested by over trading. Unless you are an experienced trader, overtrading can lead to significant losses for you.
Fear is often mentioned in the same sentence with greed. There are several ways in which it can be described in the market. For example, you could be fearful about opening a trade because you are afraid about the potential losses. Also, you could have fear of closing a profitable trade because you expect the profitability to grow.
» Related: Other emotions that could give you
Why greed can be very bad
In the previous section, we have looked at ways in which greed is manifested in the market. So, let us look at some of the top dangers of being greedy in the market.
First, greed could lead to substantial losses. For example, when you overtrade, you expose yourself to the risks of losing money. We recommend that you focus on opening a few trades every day. Always ensure that you have researched all your trades well and identified key support and resistance levels.
Second, greed can make you ignore risk management in the market. For example, when you are greedy, there is a likelihood that you will not have the discipline to place a stop-loss and take-profit at the ideal locations.
Third, there are emotional risks as well. For example, you could move from stress to depression since you trades are not working. Also, you could have anxieties any time you hear about the market.
How to avoid being too greedy
If you are under the influence of the strong impulses created by the feeling of greed, you may be doing things that you would not otherwise do. If your judgment is being clouded by strong emotions, your trading strategy may suffer, and you can’t always afford to ignore this situation.
How can you tell if your ability to reason has been impaired by greed? It is difficult, but here are some useful techniques you can use:
- Keep track of your trades. If you can afford to remember how much money you need every week, you can also afford to keep track of your winning and losing percentages in a trading journal.
- Carefully observe the impulse to throw caution to the win and trade like mad until you hit your performance goal.
- Practice healthy skepticism when you start to perceive every stock as a winning asset.
- Manage your stress. When your mind is calm and balanced, your decisions can happen in response to accurate perception of events. When your mind is clouded by greed and anxiety, you can quickly lose the ability to make good judgments.
- Pull some money out from the market. Always trying to make more money is a sure sign that greed has you in its grip.
- Avoid trading more than your normal average. When you find yourself doubling the amount of trades you perform during the day, your judgment is probably under the influence of greed.
- Keep your profit margins in perspective. Most earnings are based on small movements, so attempting to win big could be a sign that you have fallen under the influence of greed.
- Monitor your percentage margins for each trade. If you notice them increasing during a string of losses, your judgment may be cloudy.
- Stick to your opening position for price targets. Changing this on a whim can steer you off course.
- Don’t forget your own rules. For certain kinds of activities, there is no substitute for experience.
Summary: How to menage greed
Day Trading can become a kind of art when you are able to monitor your internal influences while also exercising good market judgment. The practicality of these observations may help you to recognize the true value of this practice.
Think of it as a fringe benefit: Day Trading can be refined to generate positive outcomes. This method helps you to develop a human skill with many other possible applications in life.
External Useful Resources
How to Manage Fear and Greed in Trading - DailyFx