Trading Psyche– Greed and Detachment

The next emotion I want to deal with in this series of posts on the psychological aspects of trading is Greed. You don't have to hang around trading circles for long before hearing something like, "The markets are ruled by fear and greed." I don't know whether "ruled" is the right descriptor, but fear and greed are powerful influences on anyone entering the trading game.

I dealt with Fear a bit in a previous post, and now it's worth taking a look at the role Greed can play. The simple Webster's definition of Greed is:"excessive desire to acquire or possess more than one needs or deserves"

I'm not here to tell anyone what they "need or deserve" in a broad sense. In trading, however, the attempt to acquire more than "one deserves" might mean doing somewhat unnatural, or unwise things to attempt gaining more than your trading strategy will support. There are many ways this might manifest itself in one's thinking... for example, you might find some of the following internal dialog taking place:

• "I'm up so I can take some chances with the house's money".  Uh, not really. First, the pattern of behaviors that attained this level of gain seems to work... why change it? Second, you're supposed to be up. Trading is a business. It's supposed to be profitable if done well; so the idea that I can play fast and loose with gains is an extremely poor business model. The position sizing that got you to this point was a good idea before the big gains, and it's still a good idea now.
• "I can do no wrong... every trade is a winner." Well, good for you... you won a few. If you trade long enough you will eventually end up with a nice string of winners. This is especially the case if you engage in relatively high probability setups. With options trading, far-out-of-the-money credit spreads and many other high probability strategies tend to yield many winning trades in a row. Guess what? You haven't changed the long term statistical probabilities. Eventually you will have your share of losers. The thinking of "I can't lose" causes us to take extraordinary risk that will damage our account balance when the inevitable loser hits. Gloating will usually get you into trouble.
• "I'm winning but I could win faster if..." The desire to gain more faster, is a sign of Greed typically leading to a change in trading rules. Perhaps you are tempted to change the rules of your trades, or the position sizing, or the number of trades you are taking. Again, the rules that got you here are the very ones you are thinking changing. Think long and hard about that before taking any action. Certainly we can improve our trading approaches over time, but as I've said often, changes in strategy are not to be done during the heat of battle. Especially this they're working, you have lots of time to think and evaluate before taking on a new strategy.

Generally, the feeling of wanting to go faster occurs when we've had a few nice wins, or win things are going particularly well. One of the most important things to remember at all times is: The rules that got you here (entries, exits, positions sizing, adjustments, vehicles, etc.) were good when you established them, and are most likely still a good idea. Be very slow to change your trading strategy if it is working.

Trading, when done well and according to fixed rules, will probably be boring. If I find that it gets exciting I am probably over-trading. It’s not designed for entertainment or excitement, but is more like working in a factory on an assembly line, doing the same thing over and over again, and producing a quality product.

In case you haven’t figured out by now (and by the title of this post), the cure for greed is detachment.  Rather than getting wrapped up in the outcome, maintain a healthy detachment from it, and continue to trade your plan.  This is one of the best reasons to have a concise trading plan to guide you through the roller coaster of emotions every trader encounters.

Good Trading...