Controlling Greed in Trading

Back in the 1987 movie Wall Street, Michael Douglas’ character, Gordon Gekko, gave his (in)famous

Money Management

Never put more than an absolute maximum of 5% of your trading account at risk at any one time. This means no matter how many trades you have open at once, if they ALL turn out to be losers (yes, that can happen), you will not lose more than 5% of your trading account. Keep in mind that when it comes to risk, less is better than more. So 3% risk is better than 5% and 1% is better than 3%…you get the idea.

Also, always trade with a 1:2 Risk Reward Ratio in place. This means if you’re risking 50 pips on a trade you should be looking for at least 100 pips of profit on that trade.

(Later articles and commentaries will specifically and in detail address the concept of Money Management in trading.)

Lastly, once the trade has triggered with stops and limits in place – I cannot emphasize this next point enough – LEAVE IT ALONE!! Just let the trade play itself out according to the original parameters you put into place prior to being in the trade…when emotions were non-existent.

Take a minute and let this sink in…

When you were looking at the charts, checking for trends, support and resistance levels, relevant fundamental announcements and the like, you were totally without emotion. You had no “skin in the game” at that point. The plans that were put together at that time were based on facts. Once the trade is entered , however, emotions can shift into high gear as money – your money – is on the line. Making changes to a fact based, emotionless trading plan based on moment to moment emotional shifts induced by price action in the market is not a prudent way to trade. It is a deadly way to trade.

Managing and dealing with the emotion of greed is not something that will be resolved over the next couple of trades. However, by being conscious of how greed can negatively impact your trading and implementing the former ideas as part of your trading regimen, you will be taking positive steps toward the goal of greed free trading.

All the best and good trading,
Richard Krivo

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