Controlling Greed

Apr 27, 2009: 10:52 PM CST

Greed is often more discussed in the literature of Trading Psychology because it’s an easier topic to discuss than fear.  After all, we trade to make money, and it’s easy to let that impulse dominate us and get carried away, particularly if we are experiencing success.  What’s so wrong with greed anyway?

Greed by itself or in moderation might not be so bad, but it’s when the greed emotion takes over and causes you to act either against your plan or your best interests that it becomes problematic.

Greed can cause us to do any number of the following ill-advised trading behaviors:

  • Buying in after a long rally just because we think price will always go up
  • Not looking at the risk in a trade, or identifying an acceptable stop-loss
  • Ignoring the need for a stop-loss
  • Taking on a larger position than normal
  • Rapidly increasing our position size because we think we can’t fail

Mainly, the market has a way of making us feel humble by giving us a loss when we feel most confident.  We feel most confident after a big win or a series of small wins which causes us to alter our normal trading methods and behave outside of our plan.  When we feel most confident, we focus on how much the market (trading) can GIVE us instead of how much we can lose – in short, we discount the risk of the marketplace when we are experiencing excessive greed.

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