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Learn how to control the greediness and increase the level of trading discipline.
There are many psychological barriers in human brains, which do not allow traders to maximize profits. Dealing with the emotional impact of trading is extremely important for the overall success while knowing your enemies would help you to fight them. Two main traps are usually catching traders, forcing them to make common mistakes: greediness and the lack of discipline. This article is dedicated to both of them, showing several useful tips how to avoid those traps, increasing the overall level of experience, as learning on someone’s mistakes is much cheaper than on own ones.
According to a well-known statement, markets are driven by fear and greediness. We’ve described the fear’s impact on traders’ sentiment several times and that feeling has to be discussed separately. We’ll focus on the second one today. The greediness can be determined as a strong wish to gain material wellness, getting satisfaction from trading. But you would say that everyone is seeking material improvement and wellness, so what’s the deal? In fact, a certain part of greediness has to be applicable for a successful trader, otherwise, he would become a player, who is just interested in the process of the game but not the result. Even sportsmen traditionally think not only about the historic achievements but also remember about payments from commercial contracts, federations and so on.
However, if the greediness becomes a complex of arrogation and an uncontrolled wish to get profitable results in the shortest period of time despite the reasonable concerns and conclusions, then a traders starts behaving like a non-adequate person: opens a large number of deals, often ignoring the risk management rules, hopes to endure current losses, hoping for the price to come back, and cannot take profits in time as he wants to get more. As a result, the greediness, as well as the fear, does not allow a trader to objectively assess the current situation. But while the fear pushes to close a deal too early, the greediness creates a strong wish to hold the deal for too long, despite the trading system’s signals, with a hope to get more and more profits. The balance between greediness and fear, between the wish to close the deal too early and hope to hold the deal longer with an intention to get more profits, determines the markets price action. Of course, the profit should be growing but still, any profit is better than a loss, isn’t it?
As you already should know, it’s extremely crucial for profitable trading to hold your emotions under control. An experienced trader is guided by objective data, therefore, his greediness retreats. A rational approach should be taken as the base of the decision-making process, only objective data has to be considered before pulling the trigger. Don’t forget that emotions control and objective view are the most effective tools to survive in the financial markets. How to control the greediness?
- If you comprehend the trading exceptionally as a way of getting material wellness, then you risk getting trapped by greediness. Try not to think about a potential profit but how to make your trading strategy as reliable as possible, spend most efforts for the detailed workout of the trading strategy. Get carried away by your trading system. - Watch pips but not money equivalent when you have open trading positions in order to avoid the greediness’ impact. All you need to do so is just change the settings of your trading terminal which will show you current results in pips instead of dollars, euros or rubles. That will help you avoid thinking about the money until you start counting your weekly or monthly results. - The greediness can control you if you don’t know exactly when to enter or close a deal, meaning that you have doubts in your analysis or you do not trust your trading system. Work on your trading plan and execute it meticulously. One trader said that when you work like a robot, there is no room for greediness nor thoughts about the money issues. Trust your own trading system, let it work for you! - Every successful trader knows how dangerous is to hold a position which does not meet expectations. In order to avoid overhead deals, work on the discipline of exiting the market, try to avoid any licentiousness when exiting the market for several months. - Potential risks must be planned preliminarily counting possible losses in money and fixing the largest loss amount acceptable. Your planned profit has to be higher than the planned loss (positive profit/loss ratio). Remember that if you take into the account just profit likelihood, then you would not protect yourself from potential losses. Every time you open a deal, preset the allowed stop-loss defensive order and let it be triggered even if you assume that the price will reverse shortly and go in your direction. - Monitor the price action after you closed the deal. You will be able to make a conclusion about how effective was your decision to exit the market in some time. You will also get statistics on how often your decisions were perfect. - If you get sank into losses, don't let the wish of taking the money back controlling your decisions. You might recklessly enter another deal, sometimes even despite your trading system’s signals. A break would help you to regain the logical way of thinking as the emotional impact will be eliminated soon and you would be able to analyse the situation with fresh thoughts. - Remember that greediness leads to poverty and a stingy person pays twice.
Another severe barrier to success is the lack of trading discipline. Probably, everyone heard about the fact that discipline is a crucial factor for trading. Let’s have a look why is that so important for every trader?
As long as the market is unstable as a matter of its nature, while trading is, obviously, getting profits from probability, the main trader’s goal is to build a trading strategy in a way that it would maximize the likelihood of potential profits. The markets are full of multidirectional flows and an erratic change of your trading approach would only add chaos. Any strategy requires a perfect sequence of what position has to be taken and when it has to be closed, i.e. trading positions have to be opened accurately in accordance with the trading plan execution. A disciplined trader trusts his trading system, giving it the chance to work out, increasing the chances of getting profits from the likelihood. An undisciplined trader does not always follow his own trading plan, he’s not punctual, often acting with intuition, stepping off the strategy and changing it on his own situative opinion.
As far as the trading system’s efficiency does not guarantee the profit itself, exactly the same trading strategy would show profits to a trader who executes all of the rules and algorithms. At the same time, the strategy would give a completely unpredictable result for those who violate the rules. As a result, non-systematic action would have a completely unpredictable performance, bring an additional chaos element into the trading process and finally lower the probability of getting profits. If you close deals too early, enter the market whenever you wish, that would not allow you to effectively assess the trading strategy and the process of seeking a profitable system would drag on years. Experts admit that the vast majority of traders waste trading accounts due to the trading system violations, as even the most profitable strategy becomes useless without exact and rigorous executing of its rules.
Try to look at yourself from aside and assess how disciplined you are. Think about how easy do you follow your trading plan, how often and why do you step off its rules.
How to increase the level of your trading discipline?
- Be consistent in your work, develop clear rules of your trading system and execute them however tough would they seem to you from time to time. - Your trading strategy has to be worked out in details, you should not doubt about when exactly should you enter the market and close a position. - Money Management rules must be used in the trading strategy. - Get focused before trading and set yourself goals that you will trade today following the strategy rules. - Keep the trading diary which will allow you noticing and analysing cases when you violate the trading system’s rules.
You also should not forget that the lack of discipline, in general, is a feature of the character, which appears not only in the work process but also in daily life. How often are you running late? Break up plans and promises? Spend more money than the budget allows? Cannot control the thirst for pleasures? Probably you should try controlling your own life more thoroughly.
Of course, a disciplined trader is not pedantic always in all of his life aspects, however, the same strategies which are used in usual life often reflect in the trading process. Try to control your life as much as you can during several weeks. Don't try to control all of your life aspects, start with some particular space, in which you would increase the self-control. For example, the part of spending money or time dedicated to some occupation, food, etc. Write down a plan of wishes, describe your goals and targets in details, and try to execute the plan scrupulously. Analyse at the end of the month, what exactly did you manage to achieve and what else should you keen on. And work on the plan for the next month.
According to psychological researches’ results, a human needs three weeks on average in order to develop a certain habit. If you followed your own plan within that period, desirable action will be fixed in your behaviour and will become a habit. You’ll discover that holding impulses is required rarely as you will execute the desired action automatically. After that, you’ll be ready to take another aspect of your life under control and work on other habits purposefully.
A character trait is actually the same habitual behaviour or reaction on certain life circumstances, thus, it’s possible to correct your character, making some efforts. In our case, working on ourselves would help increase the trading discipline level, gaining self-control skills, which will positively influence the ability to execute trading plans. It’s worth trying that as the key trading rule says that executing plans is crucial for the overall profitability.
There is one more psychological trap to be considered - conformity. That’s a psychological term meaning human’s aspiration to correspond the majority’s opinion, adjust own thoughts and actions in accordance to it. An extreme form of conformity is a total absence of own opinion.
According to Aristotle’s phrase, “a human is a social animal” - this is why conformity is more or less inherent to all of us as to a member of society. People communicate, feel each other’s needs and values, adjust to them and make mutual concessions. Otherwise, there will be no effective cooperation. That’s an unavoidable process in such collectives like family and labour collective. According to social-psychological researches, adaptable reactions depend on sex and age. A person is inherent in adapting to others’ opinion if he/she is incompetent or not interested in a particular task or even has a low position in a group. In relation to personal features, the lower self-esteem and self-respect are, the higher dependence from others’ opinion and anxiety level are.
Others’ people opinion has to be shared in order to build a successful career, and a careerist has to fit in an organization, staying in accordance with its spirit and style. It’s really important no only to find a common language with key persons in the collective but also to feel the development direction which has been chosen by the management. An independent loner, who always doubts about group’s decisions, would not obtain leadership positions.
However, things are completely different in trading. A tendency to adapt to others’ opinion is more a disadvantage for a successful trader than a benefit. Adapting position, when a trader is influenced by others’ opinion, forces traders hovering from one opinion to another, changing the trading decisions several times, which is not profitable at the end of the day. Traders often change strategies, seeking a perfect one instead of working on the efficiency of one profitable algorithm. Such an often change of strategies would lead to a disappointment in trading in general.
Psychologists say that the massive mind is stereotypic. A stereotype is a simplified opinion about something based on a generalized experience (for example, a statement that intraday trading is the most profitable type of trading). On one hand, stereotypes are gradually useful as they are based on a compilation of others’ experience. In fact, stereotypes are kind of psychological blocks in our mind, obscuring the overall perspective and preventing from making reasonable decisions. Possibly, more long-term trading with larger targets would be more suitable for you, while you ignore it, staying under the influence of others’ opinion. Stereotypic thinking does not allow traders to make the right decisions, based on objective data, confirms traders’ unconfidence in their strategies, the lack of personality development. Stereotypes have to be taken into the account but just as a subject of own research and analysis in order to create personal opinion regarding those issues.
Traders should find personal decisions, leading ahead of the crowd but following it. When a large number of people bets in one direction, it’s often too late to open that position. An attempt to join the price action, like an attempt to jump in an outgoing train, might turn into a miss, as the likelihood of a late entry is huge in this case. In the opposite, understanding of crowd’s motivation, acting irrationally, under the influence of fear and greediness, it’s possible to predict a trend direction before it starts moving and make money on predictable crowd’s actions.
Traders should be autonomous personalities, acting on their own, do not try to trade like somebody. Remember that an effective strategy is always individual - find your own technique, develop the individuality. You should always gain more knowledge and experience, which will give you an understanding of the market. If your strategy did not work well yesterday, you should not turn for 180 degrees, seeking a new one. Try to analyse the situation instead and possibly, correct your own strategy. Let your own path to success be a purposeful way to the goal but not blind copying of someone’s opinion.