Most books, tutorials, and classes on trading discuss the concepts of fear and greed and how they can be extremely detrimental to your trading, but few discuss specific ways that you can mitigate the emotions.The problem is that you are conditioned to act and think in a certain way from the moment you are born. And emotions like fear and/or greed can actually be good emotions to have in certain areas of your life, just not in trading.
The fact is that you cannot control your emotions. So simply telling yourself to stop being greedy or stop being fearful will do nothing. Also,telling yourself to be disciplined and simply follow your system will most likely do nothing. Most traders will once again make an emotional decision based on these negative emotions and end up trying to rationalize it afterthe fact.The key is that you need to create practical parameters for yourself that will mitigate the magnitude of negative emotions.
Let’s look at a basic example to illustrate the concept.Let’s assume that you have a trading system and you make a trade that goes against you, and the rules of your system are telling you to cut your losses. If you close out your trade, you will lose $5. Most likely,you are not going to have a problem exiting your trade for a loss. This is due to the fact that the emotion of greed will not kick in as much when it comes to a $5 loss.
Basically, most people are not very emotionally attached to $5.Now let’s imagine the same scenario, but now you have to realize an $80,000 loss, which also happens to be half of your life savings. Now, there is a very good chance that most traders are going to have a pretty big problem pulling the trigger and exiting the trade for a loss.It is highly likely that the trader who is experiencing the $5 loss wagered less money on his trade than the trader who is experiencing the $80,000 loss.
This is obviously a fairly drastic example, but it is meant to emphasize the point that you can set specific conditions on your trading strategy that will be able to mitigate negative emotions.There is a famous saying by Sun Tzu in his book The Art of War: “Every battle is won before it is ever fought.” The same concept applies to trading systems. Unless properly set up from the onset, trading systems may be doomed before you ever even make your first trade.
This is regardless of how great your indicator, trading robot, market research, or signal service is.Conversely, if you set up proper parameters for your trading system,particularly risk and money management, from the start, you will have a much higher likelihood of avoiding the detrimental effects of negative emotions such as fear and greed. This is not to say that your system will necessarily win or be profitable.
Setting up proper parameters means that you will have better control of your trading and will be less likely to lose an amount that will have a drastic impact on your financial well‐being.If you want your system to perform well for an extended period of time, it is absolutely a must that you take practical steps to diminish the negative effects of greed, fear, and justification on your trading system.