When Greed Hits You
I know when I am trading when greed has hit me and wants to take over. I have these mixed feelings of excitement and elation and nothing else matters. The feeling I get makes me believe I can not be wrong. In fact how could I be wrong when the last one, two, three four or more trades have gone my way. I am on a roll, invincible. Then greed kicks in. I move my position up a little, then I have a wider stop because it doesn’t matter anyway after all I can not be wrong. I even look at entering trades that are not strategy set ups.
When you get the feeling of invincibility in trading and start getting the feelings and doing the actions outlined above then it is important to stop. Greed can take over in one second and send you in a spin which can easily wipe out any winnings or worse still reduce your equity curve to zero.
Dealing with Greed
We all face situations in our lives when we need to deal with greed. This does not have to relate to money. Indeed there are issues with being greedy around food, possessions, time with people and so on. To deal with the whole issue on greed could take some time and would require a large amount of writing space. I am going to stick with the issue of greed when it comes to trading. When I talk about trading it can refer to forex, options, futures, stocks, commodities, indices and any other financial instrument. Here are my six tips for dealing with greed in the trading environment that I will discuss further.
- Only ever trade your Strategy
- Stick to your Trading Rules
- Only risk between 1% and 3% depending on market conditions
- Always have your Position Size relative to your Risk
- Be Consistent
- Do your own Analysis
Only ever trade your Strategy
I have an excellent mentor who has shown me several strategies regarding trading. I tested these strategies to assess if they worked for me and I could use them to fit into my trading schedule. I am using one of the strategies for a more longer term approach which can net between 100 and 500 pips in a weeks worth of price action. If I do not see a trade that is set up with my strategy I simply do no trade.
The markets have been around for many years and I am sure they will be round for more to come so as long as you know you can get a good number of pips from your strategy per month then there’s no need to force the trade. For me I actually do not want to stress out and trade all day, every day so my strategy is great for me.
Have a set of rules within your strategy that tell you what criteria you are looking for to enter the market. The criteria should include when you could exit and the value within the market. As with all these rules the emotion is taken out of trading when you become more mechanical. So you have a tick list once all criteria are met and you have value in the market then the trade is good to go otherwise stay away.
Stick to your Trading Rules
Have a set of trading rules that you stick to like glue. This is critical to trading and will help take the emotion out of trading. You do not want to be haphazard with your trading for sure so you must have some guidelines set out detailing your behavior towards trading. So for example part of your rules will be which markets you trade, the times you trade, the time you will dedicate to trading each day and so on. This is sometimes referred to as a trading plan.
Trading should be treated like a business and any organisation that succeeds has plan. So trading is no different. Therefore you must treat trading and put together a business plan (set of trading rules) that govern your behavior. You will have have your objectives with the plan so you can keep a check on your progress.
If you have a plan and are able to check your progress against it then sticking to it will go some way to help combat the times greed tries to kick in. By sticking to your plan and rules you will force the decision not to enter a trade that does not contribute to your progression. Just like a business will not enter a market that is not in the business plan then you will not enter a trade that is part of your business plan.
Only Risk between 1% and 3% depending on Market Conditions
This is a straight forward rule to follow however once greed takes its hold on you then here is where the trouble starts to really kick in. The simple rule is if you have an account size of £10,000 then your risk is between £100 and £300 per trade. Simple!!! Just remember when the market conditions are difficult to trade keep your risk level low. When you have more confidence in the market dial it up to 3%. Never go over 3% because it is very easy to go on a losing run of four, five or more trades. You can even lose 10 trades, which if you have a solid strategy should not happen, and still be in the game because you will have lost £3,000 so still having £7,000 to trade.
Always have your Position Size relative to your Risk
Once you know the amount you can trade with, so continuing our example from above say £300 per trade, then you can adjust your position size depending on the value you have recognized in your trade set up. If, from your analysis, you would place a stop 100 pips from your entry then your position size should be £3 per pip. If your stop loss was 200 pips away then the position size should be reduced to £1.50. So the maximum you will ever lose is the amount you have previously agreed (with yourself) as being available to risk on the trade.
You will lose a trade. You will lose trades. Fact. So get used to it and live with it. What you do not want to do is lose a trade then chop and change you strategy. One of the only ways that you will be successful in trading is to ensure you have a strategy that you will stick to on a consistent basis over a long period of time. Give your strategy time to win. Now if you give your strategy time by being consistent you will know and accept the level of winning trades. Once you know and accept this you will then negate any effects of greed because psychologically you have already accepted a set of results so once you receive what you have expected you can move on with other trades that are defined within your rules.
Do your own Analysis
It is very important to do all your own analysis when trading. Yes it is great to speak with other traders and learn from them however ultimately it is you that will be pulling the trigger so you are responsible for all your trades. Now this is important in relation to greed because once you have done all your analysis and followed your rules are then in a position to make a clear decision. So based on your rules and analysis you can take greed out of the equation because quite simply it will not be an option.
Greed is only of the disciplines you must master to become truly successful at trading. You can learn more and follow my trades and analysis for free on http://www.myforexjournal.com. I look forward to speaking with you on the site and helping you as much as possible.