Updated from its original posting on 2012-03-09
“A greedy person and a pauper are practically one and the same.“
The Swiss proverb above couldn’t be more true for us forex traders. As you may know, many traders (and their accounts) have suffered because of greed. In fact, this is how the saying “Bulls and bears make money; hogs get slaughtered” came about. No other animal embodies greed better than the hog, and in the trading business, the markets show no mercy to hogs.
What is greed?
The Merriam-Webster definition describes greed as “a selfish and excessive desire for more of something (as money) than is needed.” Sound familiar?
Let’s face it, it’s our desire to acquire handsome returns that drives us to trade, but this desire becomes unhealthy–even dangerous–when it is EXCESSIVE.
That is why greed is often considered the most dangerous emotion for traders; even worse than fear. Fear can paralyze you and keep you from trading, but your capital is preserved for as long as you keep your hands in your pockets. On the other hand, greed PUSHES you to act, in ways and at times when you shouldn’t; that’s why it is dangerous.
The dangers of greed
Greed prompts you to act irrationally. For traders, this usually comes in the form of overleveraging, overtrading, chasing the markets, or holding on to forex trades you know you should’ve exited long ago.
When you think about it, greed is not that different from alcohol; it can make you act foolishly when you have too much in your system. When it comes to a point that greed clouds your trading judgment, you are practically drunk with it.
Like many other worthy endeavors, overcoming greed requires a lot of effort and discipline. It isn’t easy, but it can be done. It’s all a matter of taming your ego.
You will have to admit and accept that you won’t make the right call every time. There will be instances when you won’t catch the market’s full move, or times when you will miss a nice setup altogether.
But that’s just how trading goes. When you accept that the market is bigger than you, and that you’re bound to make mistakes, then you’ll be more focused on following your forex trading plans instead of succumbing to greed.
A lot of successful traders have said that they’d rather be lucky than good. For them, it’s better to attribute success to luck than their own skills. It might not be good for the ego, but it’s definitely good for your trading psyche. And that’s probably one of the secrets of trading. Don’t be a hog and you won’t get slaughtered.