Greed is one of the main contributors to trading loss. Greed mangles the mind by distracting the trader from what matters most in the trade, which is quite frankly to protect your capital by prudent planning and following rules. Once a trader starts doing profitable trades, overconfidence creeps in and trader wants more and more profits. Go back in past and try to remember how many times have you lost a big chunk of your profits because you got greedy and did not slicked to your trading plan.
Greed can arguably be thought of as a fear of not having “enough.”
Fear is again a major contributor of reducing your profits. Again try to remember trades where you have exited early thinking its cannot go up more and stock just kept on going up.
Now, the question is what do you do about those bouts with fear/greed emotions that takes your trading effectiveness and lead to major losses? The important thing of course, is to manage your fear/greed emotions during trading.
I have interacted with many traders and most of them want to take emotions out of their trading , But is it really possible to take emotions out of trading? Emotions are an inextricable part of being human and cannot be totally taken out of the trading equation. Not all emotions are bad for traders, and there are positive emotions also which can increase your trading effectiveness many folds. However, you wouldn’t “want” to take emotions out of your trading even if you could. Yes, negative emotions throw a monkey wrench into your process; for instance, anxiety, fear, greed, guilt, self-doubt, impatience, apathy, to name a few are what mangle your thinking.
But what is also true is that positive emotions support effective decision making and follow-through. Emotions like inspiration, determination, patience, confidence, curiosity, and the satisfaction of viewing your trade run its course successfully are highly supportive to effective follow-through. So, if you became actually emotionless, you would be divesting yourself of the power of positive emotions and further making your trading journey difficult.
So the next questions comes is “How can I maintain more of my positive emotions?”
Well, the first thing that you want to do is to monitor your thinking. What and how you think is where emotions begin. Look at it this way. If, during a trade, you tell yourself things like “I don’t trade very well” or “This type of trade really turns against me” or “I’ll probably make a mistake on this trade.” Then, emotions of anxiety, trepidation, fear, and self-doubt, among others, is what follows. Emotions are connected to thoughts. If you think positive thoughts, then you will respond with an increase in positive emotions. Thoughts like “I would stick to my trading plan”, ” I want to be a successful trader”.
On the other hand, if you think negative, power sucking thoughts, you will begin to feel in ways that are consistent with those negative thoughts. So, you must not only monitor your thoughts, you must change them when you become aware that they are negative. Changing negative thoughts can be challenging and difficult when you first begin the process; but if you remain diligent, you will begin to consistently reverse negative thinking.
So, the next time that you are feeling “greedy” or “fearful” it is very important to take an active role in finding out what you are thinking in order to change negative, unsupportive thoughts to positive powerful thoughts. Remember, effective trading is not solely connected to profit and loss, but to trade right as per trading plan. Making money is always a by product of trading right.