Almost all people who go into trading are at least partially driven by greed. Maybe not in a bad way, maybe not in excessive amounts. But it is there.
This is natural and is part of our human psyche. But it can lead to disastrous consequences if you let it drive your decisions and trades. The ideal way to manage it is to limit its influence and flip it around – make it useful.
How to do that you may ask. Let’s start at the beginning.
The definition of “greed” in dictionary.com is “excessive or rapacious desire, especially for wealth or possessions”. This makes it probably the most dangerous feeling that a trader can have because it’s not a tool to make profitable trades. It’s a shroud that covers our rational part and lets the aggressive one lead it along.
Overtrading, taking on too much leverage, trying to make up for a loss or keeping trades open long after they should have been closed – all these are examples of greed.
Its effect is not dissimilar to drugs that change the way you act. Too much of something changes you until you can’t even recognize yourself. Except in this case you could be sober and in front of a computer screen, or your phone, looking at a chart with candles on it.
Overcoming greed requires discipline, something we discussed at length in another article.
Accepting it as part of your motivation for trading and finding its place are the two things you need to add to your discipline. Here are some specific steps that you take:
- Placing reasonable targets on your trades. Base them on the market conditions, not on the amount of money you want to win.
- Adjust take profit and stop loss levels according to the market, not what would make you happy or sad.
- Don’t increase position sizes when you feel stronger emotions because of a series of winning or losing trades.
Using greed as a tool to generate a healthy risk/reward ratio is the psychological balance that winning traders possess.
But don’t confuse greed with risk. Especially with healthy risk. Yes, only those who play get to win but in a game like trading staying on the sidelines also means not losing your capital and could actually be the best choice in many situations.