How To Handle Greed and Fear In Trading
Greed and fear are two emotions that cause most traders to lose money in forex trading. Even expert traders are sometimes victims of these emotions. But how do you conquer them?
In trading, fear and greed are two of the most catastrophic emotions any forex trader could ever give in to. They are some of the reasons most traders fail.
Greed and fear are dangerous because they prevent you from making proper trading decisions. And forex is a game of decisions.
How then do you handle greed and fear in trading? We answer this question in this piece.
What is Fear in Trading?
Notice we aren’t just asking what fear is. We assume everyone is pretty familiar with that, regardless of if they trade the financial markets. Rather, we’re discussing what “fear in trading” is.
Fear in trading is when you allow your emotions to cripple you from making the decision you know you ought to take. That decision may be making a trade, closing a trade, or using proper trade management.
Suppose you know that the market is set for a bullish run, and you think your trading strategy is set to catch it. But because you wrongly assumed the same thing in the past and got burned for it, you fear that the past might repeat itself. You then refuse to take the trade.
That is a perfect example of fear in trading, as it prevents you from making the decision you should have.
The Four Fears of Trading
From history, we know that there are four major ways fear in trading presents itself. Even expert traders sometimes find themselves falling into the traps of these four fears:
1. Fear of losing
The fear of losing sets in when you don’t want to lose your money. It can even prevent you from pulling the “open” trigger in trades you know you should. This is very common among novice traders.
The earlier you come to terms with the fact that losing money is a part of the financial market, even for experts, the better it is. No professional trader who has lived or is living has ever not lost money to the financial markets.
Managing your losses using proper risk management is another way to mitigate the fear of losing because you know you’re only going to lose an amount you’re comfortable with.
2. Fear of missing out
The fear of missing out often happens when the market is on a huge trend, and every other trader is profiting from it, but you aren’t. And because you don’t want to miss out on the goodies, you jump into trades without proper analysis. More often, trades like this often end up in losses. That is what we call FOMO trading.
You can handle the fear of missing out in your trades by always keeping a cool head. The market is always going to move in trends, so even if you miss this one, you’ll prepare for the next one so that you can catch it.
Suppose you still don’t want to miss out on the trend, you need to wait for a perfect time that your trading system supports before getting in on it.
3. Fear of being wrong
Many forex traders, experts or novices, fall for fear of being wrong. And this fear manifests when you are not confident in your trading system.
The fear of being wrong often brews up when you read too many analyses opposing yours that you’re not sure what you should do anymore.
You can conquer the fear of being wrong by rigorously testing out your trading plan across various market conditions to be sure that it works. This way, you can always trust your trading plan because you know you have something that works.
Another way to place a tight lid over your can of fears is by limiting the number of analyses you pay attention to. Cut them down to a very few so that fewer voices tell you what to do, and you can pay more attention to your trading plan.
4. Fear of losing profit
The fear of losing profit is also common among novice traders who want to keep their profits so much that they make irrational decisions like moving stop losses to break even too soon or getting out of the trades too soon.
You can handle the fear of losing profit by practicing proper risk management. Before going into a trade, know your risk to reward ratio, and don’t stop until the price hits your stop loss or your take profit.
Another way to be sure you can overcome the fear of losing profit is to not be greedy with your take profit levels. Set your take-profit levels at reasonable levels rather than levels that’ll make you rich quickly. That is greed.
Talking about greed, let’s see how it affects your trading.
What is Greed in Trading?
Greed in trading keeps you in trades you should be out of. It is not the same as fear in trading, but they both have the same catastrophic effects on your trading account.
For many traders, greed is when they think forex is a get-rich-quick scheme, and they invest too much money in a position hoping to make it big in an instant. Greed makes you want to over-leverage. Greed also manifests itself in forex traders as a lack of patience.
How to Handle Greed in Trading
While every trader gets greedy now and then, you can handle it so that it doesn’t overcome you. Here’s how to:
1. Have a trading plan
A trading plan is not just a bright idea that a forex trader has that’s going to make them billions of dollars. No. A trading plan helps to eliminate emotions from trading so that you only make decisions according to your plan and not how you feel.
So, when you have a trading plan and follow it, you are not letting emotions like fear and greed force you to make bad trading decisions.
It also helps if your trading plan is successful and you’re confident in it. That is, you have tested it on demo trades across different market conditions, and it has come up trumps.
2. Practice proper risk management
Although proper risk management is also part of having a trading plan, it is so important that it deserves to stand alone.
When your risks are adequately managed, you limit your losses, and you’re less likely to be overcome with the need to revenge-trade to make back your loss.
3. Be patient and learn
Forex may not get you rich tomorrow if you trade it properly. But if you are patient and learn from every mistake as you go, forex can make you rich over time.
Remain patient and learn when you need to.
Greed and fear in trading are disastrous. They could ruin your trading account. But the good news is that you can overcome them through the steps we listed above.
Also, FXSSI has products in the form of indicators that can help you mitigate fear and greed trading. We recommend you go through them to see which one works for you.