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What is greed? and how greed will affect your trading

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What is greed?

Greed is an intense desire for something. This is high, especially for wealth. There’s no greed when we do not have any positions in the market. Greed negatively influences trading decisions in a winning trade. We try to show greed when we:

  • Keep holding onto our losing trade.
  • Add capital to a winning position.
  • Take higher leverage

Greed impacts your mental state. That exploits your focus to maximise profits and wealth.  The desire for money makes a trader to take trades. They otherwise would not have thought of taking it.

Greed is a direct threat to the trading account. It not only results in margin call from the broker but can deplete your account permanently.

Example of greed

The chart below shows how greed can negatively influence trading. Here the trader enters a long position hoping that it will go higher. But the market moves lower, and now the trader is in a loss. When the trader sees signs of market turning around, he opens new long positions. This temptation is caused by greed. Later we can see what happens.

It is a great feeling for traders when they think, buying at a low point can turn a losing trade into a winning trade. Such greed can make traders blind, and they don’t even notice the trend.

Greed is accompanied by fear. One feeling arises due to the other.

Biasness towards market

Greed causes “bias”.  The desire to profit from the market makes us look for information that can justify our position.  When we see news or facts that are opposite to our thoughts, we just ignore it.  We would not even like to read about it. There is also fear that it will distract us and change our mind.

For example, after all, research and analysis, you conclude that the S&P 500 will go down. But due to some reason S&P 500 keeps going up. Now you are in shock. You start looking for news events and other pieces of information which will justify your position that the S&P 500 should go down.  You ignore all the facts and figures that actually point it to go up. Now again, you relook at things and finally accept the truth. You come to the realisation that you cannot keep losing money.

Even though in a losing position, there is more hope than greed. The initial thought of ignoring bullish markets and sticking to sell is nothing but greed.

Always be informed of all the things that are going around in the market. Just because there is some opportunity don’t ignore your method and your discipline. They mess up the right mental state, and you will not be able to take even good trades. When you trade for a quick profit, these are the worst trades that you will ever make.

Keeping unrealistic goals

Another part of greed is setting unrealistic goals. Investors and traders always set a percentage of return on their investment, which they desire to get in a given period of time. For example, they say “I want to make so much money every day”. Making money on a single day does not reflect on long term returns. Numbers will be very different for when returns calculated over days, weeks and years. It is different from what traders experience on a day to day basis.

Every trading system has to go through drawdown and deal with consecutive losses. However, some traders cannot acknowledge this fact and set returns based on their financial goals. Remember your financial needs are irrelevant to the market. Setting return based on personal preference has no relevance to charts.

If you look at histories of fund managers, advisors they set their goals based on market dynamics, fundamental and technical analysis, they don’t have any personal preference. They too experience bad times. The important thing is not to abandon your trading system when you have drawdown or bad trading days.

Controlling greed

Fortunately, there exist methods by which greed can be controlled and overcome like any other emotion. With having the necessary discipline, it is possible to eliminate greed in trading.

Greed is the opposite of discipline. Very disciplined traders rarely fall into the greed trap. They have a plan, and they stick to it. Trading journals and checklists are a great way to keep traders and investors on the right track. In this way, they will not be tempted to enter trades. Traders will follow their plan.

Traders should always set trick stop loss and target. They should know these variables before entering a trade. IN trading, this is referred to as the risk to reward ratio. Every successful trader has this trait in him.

At the same time, you need to remember that managing and dealing with greed cannot be resolved in a couple of trades. Traders should be conscious of how greed can influence their trading. You need to implement the points mentioned above strictly. It will take you closer to the goal of “greed free” trading.

Summary

Greed is a natural human emotion.  In trading, greed has proven to be a significant hindrance in the lives of traders. It leads us to deviation from the trading plan. The feeling of “a little bit more ” is again greed. This feeling turns gains into losses, and it multiplies losses beyond the trader’s expectation.

Greed is triggered when we face a situation that we had never thought of. We start to think about just one possibility. We start to blame our trading method.

Hence we should follow several rules to control greed. And try our best to stop it from interfering with our trades.

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