Greed. Envy. Gluttony. Sloth. Wrath. Lust. Pride… the seven deadly sins. According to ethics, these are the transgressions standing in the way of spiritual progress and purity. In reality though the seven deadly sins represent the dangers of both excess and defect which in modern times can be applied to virtually every aspect of life.
These cardinal vices often play out in the financial markets, leading traders to spiritual ruin or even bankruptcy. For this reason, it’s important to understand how these sins impact our trading behavior. It’s even more critical to identify the root causes of these transgressions so that we can replace them with virtues.
In this series, we take a look at the seven deadly sins of financial trading and how you can overcome them to improve your trading mindset.Financial Trading
Greed is sometimes viewed in food terms… think eating too many burgers but in actual fact traditionally the excessive desire for wealth is the first of the deadly sins and the most applicable to the financial markets. In fact, greed is one of the main motivators for becoming a trader in the first place. An entire field of trading psychology has emerged to help market participants manage their greed and avoid costly mistakes in the market.
Greed has a powerful grip on human psychology, has been at the centre of global market crashes and is one of the reasons traders and investors may go bankrupt. When there’s money at stake, greed can transform your very essence and cloud your judgment.
One of the warning signs that you have succumbed to greed is the desire to acquire as much wealth and resources as possible in the shortest amount of time. This often leads you down the path of get-rich-quick schemes and multi-level marketing scams that promise you endless riches for a fee. Within the context of trading, it may empty out your bank account quicker than you may have thought possible.
Not convinced? Take a look at the 2008 financial crisis or the dot-com bubble of the late 1990s which are perfect examples of greed in action. These events also led to worldwide recessions, forcing millions of people into economic austerity. Although the run-up to the market crash is often described as greed, the same may be said about the bust that followed. In an attempt to limit their losses, traders quickly moved out of the markets in search of less risky assets.
Alan Greenspan, former Chairman of the Federal Reserve, once described market greed as “irrational exuberance.” This may be an accurate description of a market when greed takes over.
In the world of finance, greed can also result in irrational behavior, as Greenspan accurately described. In practical terms, this leads to overleveraging, overtrading and chasing the market regardless of what the indicators are telling you.
While overcoming greed requires a lot of discipline, it can be mastered through sound risk management, a proper trading strategy and relying solely on the technical and fundamental indicators. It’s also helpful to remember that the opposite of greed is generosity. Be generous to yourself by ensuring that you’ve adopted a sound trading strategy that can allows you to keep more of what you earn over the long haul.
It’s also important to remember that trading is a long-term endeavour, not a get-rich-quick scheme and slow and steady usually wins the race. This doesn’t mean you can’t make big trades – but your outlook on the market has to be grounded in a long-term plan that maximizes your rewards gradually over time. Once you have a solid foundation in place, allocating a smaller portion of your portfolio to riskier trades may be an excellent way to boost your earnings.
One of the best ways to overcome greed in the financial markets is to utilise stop-losses and take-profit orders. These simple tools are extremely effective because they force you to close losing and winning positions, respectively. By setting up a stop-loss, you’ve just limited the amount of money you can lose on a position. Regardless of how you feel about the position in question, the moment your stop-loss is triggered is the moment you close the trade. End of story.
Similarly, a take-profit order may be a great way to lock-in earnings without allowing greed to take over. Once your position reaches a certain level, a take-profit order automatically closes your position. While this may limit your upside on certain trades, many investors believe it’s one of the best way to establish long-term gains in a market with no guarantees.
Greed doesn’t always have to be negative. By applying sound risk management and a proper trading strategy many traders manage to achieve their goals
- Utilise risk management tools
- Work on a solid trading strategy
- Don’t follow get rich quick schemes
Source: Sam Bourgi- Financial Markets Writer
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