These two emotions often rule most traders hearts when trading, fear or greed often takes over a trader’s rational thinking. The film “Wall Street” first made reference to “greed” is relation to trading, when Gordon Geko (Michael Douglas) says “Greed is good”, it was a classic line. However, more recently famed investors like Warren Buffet and Jim Rogers often say “be greedy when people are most fearful” and “be fearful when everyone else is being greedy”.
Most traders (novice and experienced) will make a “lot of money” and begin to think they are invincible (greed), this will lead to taking on greater risk but they don’t see the risk aspect of their trade. All they remember is the last few trades where they have made good money and will change their strategy without even thinking about it. It’s normal human behaviour, if you think about your daily life it is exactly the same.
They enter a big trade and it loses a lot of money, they then open another big trade and again it loses, they have depleted their account by 50% or more in just 2 trades.
FKA urges you to assess every trade independently of your last trade, and always stick to your money management and risk management strategies.
Conversely, most traders will have lost some money and fear will set in, again you would think this is “natural”, however trading is about probabilities. The fear of losing money may lead to greater losses. Those that have traded will understand this concept. An example below for those that don’t:
Trader enters a long position (buys) and sets a stop loss. The currency pair starts to fall (going against the trader) and the trader sees a loss building. It rapidly is approaching the stop loss set at the beginning of the trade. What should the trader do?
The answer is nothing but human nature begins to take over, the trader thinks hold on I can’t afford to lose this money (fear), let me move my stop loss so I don’t get closed out and realise the loss. It will turn around. An hour later the trader goes back and sees the position has fallen lower, and now thinking OMG, I can’t afford to lose this much money, its got to turn around. Let me change my stop loss again. Now they sit there waiting, sweating, biting their nails, shouting at their screen “go up”. Unfortunately it doesn’t turn around, and they lost everything in their account.
Trading should be an emotionless act, as it is based around probability. Each trade has a probability of making money but also losing money, there is no “dead cert”. It is about working out “the edge” which trades have the higher probability of success.
You need to stick to your trading strategy – write it down. Document every trade you make, how and what you were thinking when you enter a trade, what your expectations are for the trade, which timeframes you are working to.
At Forex Knowledge academy we spend vast amounts of time with our clients working and perfecting these soft skills. Contact us if you want to know more.