How to overcome greed and fear!
To commit to and adhere to ones' trading plan and money management strategy is paramount to overcoming greed and tackling fear. Faith and confidence in your trading plan and trading system to extract profits out of the market is key. Without faith you will see traders try absolutely every system and "magic bullet" only to waste countless hours and thousands of dollars never understanding the root of the challenge, themselves. Instead traders need to begin to understand what makes them tick, how they react to system draw downs and strings of loses. As soon as traders start to figure out the manifestations of greed in their trades (usually manifests itself as spending money in your head when trading-a what if?) they must choose to do what their system tells them, no matter what. Overcoming greed and not letting it take emotional control is simply a choice, a very tough choice for many, but if you can keep it under control and find balance with its opposite fear, then trading success just may be attainable.
On the other end of the emotional gambit is fear. Fear of loss, fear of gain, fear to pull the trigger may be both negative and positive. On the one hand fear can protect us from massive losses as we choose to take ourselves out of losing trades in order to stop the bleeding. However, fear may also hinder potential gains as we pull profit out before the market has reached its peak. All traders at one time or another experience what may be called protectionist fear. In order to overcome protectionist fear traders need to understand their objective trading system and enter and exit trades at the exact time when prompted. It takes both discipline and faith in your trading system to overcome this fear
An example of protectionist fear occurs when the trader is in a losing trade and the price action starts to gather momentum towards their stop loss. Instead of having the discipline to stick to their system, many traders will pull the plug before the market hits the stop, only to find the market suddenly swings in their direction and hits the predetermined exit point according to their trading system. This is when frustration and revenge start to take hold, greed pops its ugly head in, and total emotional havoc reigns, thus a string of losing trades. Another example occurs when your trade is positive and moving towards your predetermined profit point and instead of letting the trade run its' course, many traders simply close out the trade with just a few pips profit. Although a profit certainly is a profit, continually closing out trades with minimal profit may be detrimental to the trader as it may take a greater percentage of wins to equal just one loss, of course this is dependant upon the system. The fear of gain unequally skews the trading system, whereby, one loss may wipe out all the small gains therefore, more emotional havoc. Once again, faith and discipline in adhering to ones objective trading system and money management strategies are key to defeating the emotional imbalance of fear and greed.
Watch for the next installment on Patience and Discipline!