Financial markets are driven by two powerful emotions - greed and fear'. This is an old Wall Street saying we've heard more times than we care to remember, but still holds true today.
Whether one admits it or not, greed and fear are two drivers that have a big impact on our lives. Unfortunately, these emotions carry over to our trading, which, if not controlled, can have a detrimental effect on your account.
What is greed?
The term 'greedy' has a powerfully negative undertone. As a child, we're sure you've all been called greedy at some point. Keeping one's chocolate-covered fingers out of the cookie jar was just too hard to resist for most children.
Greed, as per The Free Dictoniary, is defined as: an excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.
A clear-cut example of this was the US subprime mortgage crisis, which eventually led to a financial meltdown. Most of the blame is said to be at the hands of the mortgage lenders. It was these lenders who ultimately approved the mortgage agreements for clients with poor credit history and a high risk of default. An example of greed that doesn't include financial gain or material wealth, however, can be as trivial as a family member who scoffs all the cookies without sharing, even though they know others in the house usually want a cookie or two with desert.
So, is greed ever considered a good thing? From our perspective, yes it can be, as without greed, humans may lack the motivation required to build and achieve new things. A good example of this is when a company puts together an incentivised compensation program for their sales team, allowing sales employees to earn as much money as possible. When the company makes money, the sales executives make money. Good greed at its finest.
What is fear?
Fear, as per Dictionary.com, is defined as a distressing emotion aroused by impending danger, evil, pain etc., whether the threat is real or imagined; the feeling or condition of being afraid.
Fear is an intensely evolutionary characteristic in human beings that triggers us to avoid danger. It's likely that some of our readers here are afraid of heights, the ocean, spiders, snakes etc. Our prehistoric ancestors had the very same fears, and this is the reason we are alive today. Luckily for us, we do not have to deal the threat of being eaten anymore!
Like most things related to emotion and instincts, fear is both good and bad according to the situation. It all depends on how you respond to that fear. If we think about it, the fear itself is just a thought. You have the ultimate deciding power on how you let it affect your actions.
So, when is fear good and when it is bad?
If the fear of failure or rejection holds you back from doing something that could ultimately benefit you (a common fear nowadays), then we'd have to argue that this is considered a 'bad fear'. In this case, you would be letting fear create exactly what you're afraid of.
If the fear of failure pushes you to work harder to avoid failing, nevertheless, then we'd argue that this is a 'good fear'.
Fear, quite simply, is ubiquitous. And there is very little one can do to avoid it. Of course, we understand that everyone has different opinions on this widely-discussed subject, so do take the above as simply one view.
Does greed and fear have a place in your trading?
Unless you're a robot coated with human-looking skin, dealing with greed and fear is inevitable in trading, as it is in life. Greed, for many, is often actually one of the motivations to initially get involved in trading. Quite frankly, we don't feel there's anything wrong with this, since, as we explained above, without greed little would be accomplished in life.
As trading is a relatively solitary job, especially for the majority of retail traders/investors, we're often left thinking that we're the only ones who experience greed and fear on the charts. This couldn't be further from the truth. Let's remember that large sums of money are filtered through the markets on a daily basis from large commercial banks, mutual funds and pension funds. We're pretty sure that these guys and gals are human too, and, as such, are also susceptible to these emotions. Greed and fear is universal!
Now, let's take this a step further and look at greed and fear through the eyes of a trader named Gary. He has two year's experience in the industry and is relatively content with his trading methodology. However, he admitted that he still struggles with the emotional side of things.
In recent hours, Gary happened to come across a 'bread and butter setup' of his around the London open. He calculated his position size, double checked the setup to make sure it was in line with his trading plan and entered the trade. These trades rarely fail, according to Gary so he was naturally confident it would work out.
Ten minutes later, price was seen within shouting distance of his stop and there was no economic news scheduled on the docket. As his trading psychology books advised, he tried to remain calm and composed, but fear continued to tap away at him. He can felt his heart thud against his chest, as he contemplated moving the stop to avoid a loss. He rationalized that if he gave the trade more room to breathe, it would highly likely work out. The other side of his brain, the logical side, told him to stick to his plan. A loss is a loss, nothing to be concerned about.
If we just pause this scenario here, we're sure that most of us have experienced this: it's the fear of loss and being wrong!
Now let's look at the same trade setup, but assume that Gary's trade rallied in favour.
… Ten minutes later, price is seen within striking distance of the take-profit target. A rush of joy flooded through Gary. It was at this point in the trade, he began thinking what if this trade is a runner. So, he started looking for other places to move his take-profit order to. Meanwhile, price continued to move in his favour. Five pips ahead of the take profit (according to the trading plan), he couldn't resist the urge and moved the order thirty pips above the next resistance.
Was this in the plan? Heck NO! His plan was formed using the logical side of his brain, and by sweeping this logic under the carpet, he left himself in a very awkward position.
His eyes alternated between his profit/loss figure and the candles like his life depended on it - he was engrossed!
Was there a plan for if price did not achieve the new target? No! So, what does Gary do when price begins trading against him? Of course, he panicked.
By not following his plan, he forgot to move his stop-loss order to breakeven when he should have. And due to a recent news event, that was supposed to be low impact, the position is now trading in the red. Gary switches from greed to fear and is cursing himself for not sticking to his plan!
This is a common theme among traders, hence why learning to control one's emotions is paramount.
How does one look at controlling these emotions?
While we feel it is impossible to completely remove greed and fear from trading, here are some methods one can utilize to help minimize the impact.
- Risk what you feel comfortable with. If that is .5% of your account, then so be it. This helps one remain objective.
- We know it's difficult, but try to limit your expectations. What we mean by this is avoid thinking that this trade or that trade should win. An individual trade, if sized correctly, has very little effect on the overall results if one thinks in probabilities.
- Trade with money you can afford to lose. Trading beyond your means is a sure-fire way to make one emotional. Trading with money needed for food or housing is reckless.
- Treat trading as a business. Have a business plan in place with specific goals.
- Consider taking a break after three consecutive wins or losses. A losing streak can make you feel, well, like a loser, which can promote revenge trading. And a consecutive number of wins can make you feel like you're untouchable. Learn to recognise these signs. Take a day or two to gather your thoughts after such an event, as trading to revenge your losses will not likely do your account any favours, and trading when you think you're George Soros could have you over leveraging.
- Try to avoid looking at your profit/loss during the trade. By removing this from view, you're partially eliminating the financial element from the trade. Try to focus on pips/points.