Below are two quotes from two different traders…
“Greed has cost me more than anything else.”
“How can I control greed??? Thathas been my number 1 problem.”
Human nature being what it is, quotes of this type have come from many traders over the years.
So, how does a trader go about controlling it?
First of all, if you personally can identify with these quotes, it means you are aware that greed is negatively influencing your trading. That recognition alone is a BIG step toward resolving the issue.
To keep this detrimental emotion in check, having a definite trading plan in mind…ideally written out…will help. Keep the plan nearby where you can reference it prior to placing any trade.
It will be a strategy that you have tested and one that has put pips into your account, live or demo, over time. By this I do not mean that the strategy puts positive pips in your account on each and every trade since every trade will not be a winner. But the trading plan/strategy you are using, overall, has been adding to your account size.
Then, only take trades that fit that trading plan exactly. If the trade does not measure up, don't take the trade. You only want to enter higher probability trades…trades based on your pre-determined plan. This will help prevent just randomly jumping into a trade because “it looks kind of OK”, or the “I just like to be in a trade” syndrome.
Next, never put more than 5% of your account at risk at any one time and always trade with at least a 1:2 Risk Reward Ratio in place. Rigidly adhering to both of these rules will prevent a trader from putting too much of their account at risk as well as exiting the trade at a desirable and predetermined level of profit. Overleveraging one’s account is one of the primary faults embraced by a trader influenced by greed.
Lastly, after the trade has executed with stops and limits in place, leave it alone!! Just let the trade play out according to the original parameters you put into place prior to being in the trade when emotions were non-existent.
Think about it…
When you were looking at the charts, checking trends, support and resistance levels, fundamentals and the like, you were totally without emotion. The plans that were put together while in that state of mind were based on facts alone. Once the trade is entered, however, emotions can shift into high gear. Making changes to a fact-oriented, unemotional trading plan based on moment to moment emotional shifts is not a prudent way to trade.
Managing and dealing with greed is not something that will be resolved over the next couple of trades over the next couple of days. However, by being conscious of how greed can negatively influence your trading and implementing the above points as part of your trading regimen, you will be taking positive steps toward the goal of “greed free” trading.
Lastly, tomorrow, August 7, 2012, I will be conducting a webinar on the Psychology of Trading. During that webinar (along with taking your questions)
I will be covering the former topics in greater detail.
You can access the webinar LIVE at 1 PM Eastern time by clicking on the link below…
The webinar can also be viewed in the Course Archives area at the same link after its initial presentation.