One of the great questions in trading is how to control greed. Greed can be a wonderful motivator and help traders achieve success, but it’s also one of the biggest pitfalls that cause traders to lose.
The reality is that most often people who trade forex for a living and achieve consistent profits over time do so because they have learned how to control their greed. Not because they don’t experience it, but rather because they have learned what to do when it hits.
This article will discuss the different ways in which greed affects traders and how you can keep it from ending your trading career before its even had a chance to begin.
What’s Greed in Forex Trading?
Greed is defined as an intense desire for something, especially wealth or power.
Greed in forex trading is the intense desire for profits and it sure does sound good on paper: “I want to be so rich that I can live off of my forex profits forever” or “I want to get really wealthy by the time I am 35.” The problem with greed is that it places an emphasis on outcomes rather than the process of trading. In other words, greed makes traders focus on what they want to happen in order for them to have a successful trade or day.
Instead, traders should focus on being in a position that has a high probability of achieving a profitable outcome over time and keeping their stops tight so that losing trades are kept to a minimum. What’s important is not the outcome, but rather the process.
How Does Greed Affect Forex Trading?
Greed causes traders to have a predetermined minimum profit target that they will need to achieve before being allowed to close a trade or day. This means that greed can cause a trader to enter into a losing position with an unrealistically high profit target, which increases the amount of risk.
Although this seems counterproductive, greed can have us aim for these high targets so that we will be able to produce more revenue in a given time period. The problem is that greed clouds our judgment and causes us to make poor trade entries that often result in larger losses than if we had simply entered into the market correctly to begin with.
Greed often times overrides our ability to properly manage losses because losing means you won’t get as rich as quickly as possible. Greed makes traders hold on for far too long trying to break even or make their profits back after they are already down significant amounts of money. Finally, greed can cause you to second guess your plan and lead you away from the rules that you have set for yourself as a trader.
How Can You Control Your Greed in Forex Trading?
1) Wait for Confirmation
The first step to controlling your greed is to wait until a desired position has been confirmed before you enter the market. You can use indicators such as moving averages and momentum oscillators to confirm positions, but sometimes using price action alone is enough.
Wait for a pullback or consolidation to provide support/resistance at your entry level and then proceed with your plan from there. This way, you are focusing on being in a position that offers a high probability of success from the get-go.
2) Avoid Trading Against the Trend
Trading against the trend will almost always lead to large losses and this is caused by a market moving in one direction for an extended period of time. Constantly trying to pick tops or bottoms can be an exercise in futility because you are fighting with the overall sentiment of the market.
Focus instead on trading from the position that is most likely to continue, which means taking a trend following approach as opposed to a counter-trend approach. This way, your probabilities skew towards success and less towards failure.
3) Set Stop Loss Limits
It’s easy to get caught up in the excitement of making money in the foreign exchange market and to start thinking that you can’t lose. But if you’re not careful, this kind of thinking can lead to bad decisions, such as not setting a stop-loss.
Do not put yourself in a position where you have unlimited risk in order to achieve an unrealistically high profit target, because greed will eventually get the best of you. Your stop loss levels should be based on probabilities and factoring in current market conditions so that you don’t experience large drawdowns over time.
A good stop-loss protects your profits and ensures that you don’t lose more money than you’re comfortable with. It’s important to remember that no one can predict the future, so there’s always a risk of losing money when trading forex. By using a stop-loss, you can minimize your losses and find it much easier to hold on to your capital.
4) Trade with a Forex Trading Plan
Having a forex trading plan is the best way to avoid making serious mistakes in the market and succumbing to greed because it forces you to make decisions based on rational thinking rather than raw emotion.
A trading plan should be based around risk and money management, which means having trading tactics and strategies that allow you to limit losses and exploit opportunities in order for you to increase your probability of success over time.
It’s important when setting up a trade that you don’t let greed cloud your judgment when creating unrealistic stop-losses or profit taking targets. Your fear of missing out on large gains can cause you not control yourself when things are going well, so it’s better to set up your trading plan accordingly.
5) Follow Your Trading Plan
Following a forex trading plan is the only way that you are truly able to control greed in the market.
If you’re not following your rules, then there’s no chance of avoiding mistakes and getting caught up in dangerous levels of optimism/pessimism.
You want to make sure that you are taking trades that have high probabilities of success based on market conditions, which means following through with entries, exits, stop-losses and targets laid out in your trading plan. This will guide you towards making intelligent decisions rather than impulsive ones.
6) Don’t Obsess Over Your PnL
Rather than obsessing over how much money you are making or losing on a daily basis, it’s better to focus on following your forex trading plan and making good trades.
It’s normal for traders to fixate on the PnL of their overall account, wanting large drawdowns to turn into profit so that they can feel successful in their trading. But this kind of thinking will lead you down the path of greed and ultimately cause bad decision making.
The best way is to keep track of how much money you are making or losing from trade to trade rather than from day to day, week to week or month to month. This way, you can make adjustments as necessary without getting caught up with unrealistic expectations tied to a larger timeframe.
7) Only Trade When You’re in the Right State of Mind
Getting caught up in greed and overconfidence will allow you to make bad trading decisions when it comes to entries and exits. If you find yourself getting too greedy or upset about losing money, then it’s important to take a break from forex trading until you can get back into a position where you feel like taking good risks.
Make sure that before making your next trade, that you have good reasons for doing so because entering an unfavorable position just because it has high reward potential is one of the worst mistakes that a trader can make.
It’s also important to remember that every trade doesn’t have to be a winner – sometimes even small losses are better than no trades at all. This means that it’s okay to miss out on potential large gains if it means you can avoid a bad trade.
8) Don’t Chase Your Losses
Chasing losses is one of the easiest ways for a trader to get himself into trouble and give in to his emotions rather than rational thinking. It may feel good when you increase stops and targets to take advantage of a better risk/reward ratio, but this type of behavior will only serve to push you into the poor decision making that inevitably leads to forex ruin.
Don’t be afraid to stand aside when things aren’t going your way because it’s better not to trade than to get in over your head with the hope of making back all your money in one big trade.
9) Take Your Losses Quickly
Taking losses quickly is essential for any forex trader, no matter how large or small that loss may be. If you find yourself getting too upset about losing money, then the best thing to do is take a time out and reevaluate your reason for being in the market in the first place.
You don’t want to give into the temptation of chasing a loss and fighting for that money back because it will end up costing you more than just what you originally lost out on. If you’re taking losses quickly and following your plan, then there won’t be any reason to get upset about losing money because it will help you stay on track for making better trades in the future.
10) Don’t Try to Fight the Market – Let It Come To You
Many traders get too greedy or impatient when they see a level of support or resistance that is ‘too good to pass up.’ Instead of waiting for the market to come to them, they will try to pick tops and bottoms, which is one of the most difficult things to do in forex trading.
Don’t fall into this trap by letting yourself get caught up in greed with hopes of catching a quick trend reversal with large gains. It’s better to stand aside until the market shows itself than to fight for that first and then find yourself on the wrong side of a major swing.
Lastly, it’s important to remember that forex trading isn’t for everyone and if you aren’t able to control your greed or emotions during those inevitable losing streaks, then it’s best to find other ways to invest your money.
For more information about making wise decisions during forex trading, check out this article on how to pick the best forex brokers.
Greed can cause a lot of problems in the forex market and turn what could have been profitable trades into wipeouts, while also tempting traders with unrealistic levels of potential profitability that lead to significant drawdowns over time.
By avoiding the emotions associated with giving into greedy impulses, you should be able to limit losses and let your winners run by following a tested forex trading plan , which helps you avoid making too many mistakes.