Controlling Greed

From time to time I like to share some of the reader Q&A, as it often contains lessons or information that is important for all of us who aspire to master this trading game.

The following is a great question from one of the YourTradingCoach newsletter readers, Rory:

 

Question:

I have to thank you for providing me more info than what I have found and learned in months.

I am definitely creating a “system” or method of my own that I am becoming more comfortable and consistent with.

However, my problem is walking away after I have achieved my goals for the session.

i.e. I will attain my goal of $1000.00 using my methods fairly quickly but then I think there is more potential so I jump back in and end up losing what I made if not more.

The reason why I do this is because in the past when I have not jumped back in, I see I could have possibly made multiples more after getting out.

I have experienced the same situation when I played blackjack. (I know I just used a gambling example but some would argue there is a bit of strategy to blackjack).

Any thoughts or directions you can give to walk away and be happy with what I get rather than trying to “take a mile when I have made my inch”?

 

Answer:

Hi Rory,

This is a common problem, but not easy to solve.

This is often labeled as Greed. Personally, in my opinion, fear is the real problem. Greed is actually just one of many manifestations of fear, typically brought about through a scarcity mindset. That is, a fear of not enough profits to go around, leading you to an intense need to get back into the markets and keep trading so you don’t miss out on what’s there.

Of course, whether you label the problem as fear or greed is largely irrelevant, but it might give you a different way to look at the problem.

My personal preference is to keep trading for a complete session, rather than stop at a predefined target profit, but I recognize that many people prefer to stop at a daily target amount. And that’s fine – there’s nothing wrong with that if it’s in your plan. Certainly there are some strategies you can put in place to make it easier to stop, but REAL CHANGE probably won’t occur until you really understand and accept at the deepest internal levels that there are plenty of profits to come in future days and you don’t have to get them all today. Typically this will require you to have intensely felt the pain of having continually given back your profits and knowing that if you’d just stopped at your target you would be so much better off.

Knowing you have to change is not enough. Maintaining the motivation to change is the difficult part and it’s usually not until we’ve felt the deep, painful emotions that we’re ready to make the change. This is no different to someone trying to diet, or stop drinking, or stop gambling (or in fact any other necessary change). Usually you have to go to extreme depths before you’re ready to really do what’s necessary.

That being said, there are some things that might help.

Firstly, consider getting the new book by Brett Steenbarger, The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist. This will provide a wealth of strategies for defining and tackling the problem.

In the meantime, consider implementing a ‘Risk Manager’ position into your trading business. Institutional traders trade with a Risk Manager overseeing their daily trading, to ensure they operate within the parameters of their plan. You need to implement something similar. You may be able to do this yourself, just through placing a separate ‘hat’ on after each trade. Assume the role of a risk manager, whose job is to check whether you’ve reached the daily stop or profit limits, and halt the trading operation. Because you’re play-acting a different role, it’s not you making the decision. It’s the risk manager, who is a real stickler for the rules. It might sound stupid, but it works for a lot of people.

A preferable solution though is to use another person for the Risk Manager role. If you have someone in your home while trading, ask them to help out in this regard during the trading session. Explain to them the problem, and that you require them to enforce the ‘no further trading’ rules. Then set in place routines for you to check in with them every hour (or whatever time period works for you) to report the current state of play. If you don’t have anyone present, set someone up for an ‘end of day risk management review’. Forward your daily trade-by-trade stats to them each evening for review. If you know that someone else is going to be watching to make sure you halt trading after the limits, you’re more likely to do so. It’s easy to justify the decision to ‘keep trading’ to ourselves, when no-one else is going to know about it. If someone else is going to know though, this might be just enough to prevent it.

Hope that helps a bit.

Lance Beggs