“Greed has cost me more than anything else.”
“How can I control greed??? That has been my number 1 problem.”
The above two quotes came from emails sent to me from two different traders. I am sure many of us can identify with these sentiments. In the early days of my trading I know I could certainly identify with them! Human nature being what it is, feelings of this type have been felt by virtually all traders at some time or another.
Indeed, the desire to make more and then even more yet is very compelling.
Greed can influence us to enter trades that we never should have entered in the first place. It can make us stay in losing trades too long as well as make us stay in winning trades too long. Greed also plays a big part when we take on too large of a position on a trade in the hopes of reaping huge profits. All in all, it has a truly negative influence on traders.
Here are some ideas that, if put into play, I believe you will find yourself better able to cope with greed.
Have a Trading Plan
By having a clear trading plan that is written out, we know exactly what we are looking for in terms of an entry. Don’t compromise. Wait for the precise entry as laid out in the plan itself. Let the market come to you rather than you chasing the market in fear of missing a trade.
The trading plan will also denote the size of the trade you will make along with how you will determine the placement of stops and limits.
By knowing all of these aspects of the trade ahead of time, and sticking to them, you will be less likely to make decisions (oftentimes governed by greed) on the fly. Since we let the trade come to us initially, we start out on our terms. By knowing the size of the trade that we will make (money management) and how much we will risk (stop) and where we will exit the trade (limit), we will go into the trade with a greater level of confidence.
Think of this plan as a blueprint for your trade. Just as a builder would never even consider building a house without a blueprint, as a trader we do not want to enter a trade without our “blueprint” in hand.
Employ the Principles of Money Management on Every Trade
When it comes to Money Management, or the lack thereof, this is an area where greed can really kick in. Traders are very often tempted to put larger amounts of their trading account at risk in the hope of reaping greater gains. They try to do too much (attain outsized profits) with too little (the size of their trading account). This is particularly true when they see a trade that to them looks like a “sure thing”.
(Sidebar: There is no such thing as a sure thing.)
As traders we never know when entering a trade if it is ultimately going to be a winner or a loser. As such, in order to protect our trading account, we have to treat each trade as though it is going to be a loser. Just like in driving, we never know if this is going to be the day that we are going to have an accident. Consequently, we must always be on guard.
I am sure you have heard of the term “defensive driving”. Think of good money management as “defensive trading”.
So we do not get swept away with greed when trading, we need to have an absolute, irrevocable ceiling on the amount of our account that we can place at risk of loss at any one time. The percentage of risk that we recommend is a maximum of 5%. This means that no matter how many positions we have open, if each of those positions were stopped out for a loss, the total loss would not exceed 5% of our trading account.
The next component of Money Management is the Risk Reward Ratio. We recommend a RRR of at least 1:2. This means that if we risk losing 75 pips (our stop) on a trade, would we look to gain 150 pips (our limit) on the trade.
By adhering to these parameters, the 5% rule and the setting of our stops and limits as described, greed can no longer influence our trade. We have put the trade guidelines in place and nothing, NOTHING can shake us from them.
Leave the Trade Alone
Lastly, after the trade has executed with stops and limits in place, leave it alone!! Just let the trade play itself out according to the original parameters you put into place prior to being in the trade when emotions were non-existent.
Think about it…
Before you were in the trade, 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. Once the trade is entered, however, emotions (greed) can shift into high gear. Making changes to a fact-based, 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 one or two trades. However, by being conscious of how greed can negatively influence your trading and implementing the above as part of your trading regimen, you will be taking positive steps toward the goal of “greed free” trading.
---Written by Richard Krivo
To contact Richard, please email instructor@dailyfx.com . You can follow Richard on Twitter@RKrivoFX.
To be added to Richard’s distribution list, please send an email with the subject line “Notification”, to rkrivo@fxcm.com .
