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Greed is a natural human emotion that affects individuals to varying degrees. Unfortunately, from a trading perspective, greed is more of a hindrance than a help to the trader.
Greed can easily turn good deals into bad deals and bad deals into bad deals. This article provides some tips on how to control greed and how to prevent it from affecting your trading success.
What is greed in trading and how does it impact trader success?
Greed can be described as a strong desire for something, and usually manifests as a strong desire for wealth. This can easily get out of hand when the market moves against the trader, but can equally negatively affect the trading decision for winning trades.
Examples of greed in trading:
- ‘Losing trades doubled
- Add capital to profit positions
- overuse
Greed can change your mental state and use your focus to maximize utility/happiness/wealth. Desires for these things often lead traders to make trades that they would not have thought to execute.
Additionally, greed poses a threat to trading accounts, and doubling down, adding too much money to winning positions, and excessive leverage can quickly lead to margin calls or drain account equity.
The best example of how greed affects trading
The diagram below shows an example of the negative effects of greed. The chart shows traders entering long positions (without stops) in EUR/USD after the large green candlestick in the hope that this market will move higher. The market fell, leaving traders in the red. Greed can not only induce traders to maintain existing positions, but also to open new long positions when the market shows signs of reversing (second blue arrow).
The thought of buying at this relative low and turning a losing trade into a winning trade can be overwhelming for traders. Furthermore, this greed can blind the trader and may even trade in the opposite direction of the trend without realizing it.
Greed is often accompanied by other emotions such as fear. Fear often comes up in a trader’s journey, which is why it’s important to learn how to manage it from the start.
How to control greed when trading
Fortunately, like all emotions, greed can be controlled and overcome. With time and discipline, trades can be executed without greed getting in the way.
Greed can be seen as the antithesis of discipline. Disciplined people rarely fall into the trap of greed because they have some kind of plan and stick to it. Trading plans and trading journals are a great way to keep traders on track and not want to make unplanned trades.
Traders should also consider setting tight stops and aiming for a range of pips before entering a trade. This is called the risk/reward ratio and has become the most important characteristic of a successful trader.
It is important to remember that managing and dealing with greed is not something that can be solved in the next few trades. However, traders who understand how greed can negatively affect trading and make the above points part of their trading regime will make positive strides towards the goal of “greed-free” trading.
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