How to Control Greed
By Michael Sincere, author of the books:
The Long-Term Day Trader and The After Hours Trader
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Now that the market has slaughtered so many individual investors and traders, many people are wondering why they didn't take their 300 percent or 1000 percent gains when they had the chance earlier in the year. Most investors will rationalize they ran these obnoxiously high gains into the ground because they were afraid of the tax penalties. In my opinion, for many of these investors, it was greed that prevented them from selling their stocks.
Every experienced trader knows that fear and greed are two emotions that can dramatically affect your success in the market. In last week's article, we talked about steps you could take to control fear in these uncertain times, such as using stops, trading less shares, moving to cash, and learning how to sell short. This week, we'll take a look at greed--and how you can control it to be a more successful trader.
As traders, we have to deal with controlling greed every single day. For example, last Friday I made over 9 points in the first hour of trading by shorting VRSN and CMRC. I could have walked away from the market and called it a day at that point, except for one thing: I became greedy. Because I was flush with success, I tried to squeeze out even more profits. Unfortunately, the rest of the day I traded sloppily, as if I had nothing to lose, and lost half of my gains. Although there are no easy answers when it comes to the stock market, of one thing I am certain: If you are a greedy trader and try to squeeze the last eighth or quarter point out of every trade, it's only a matter of time before you end up with less than you started.
Exactly what is this thing called greed? Oliver Velez of Pristine.com says that greed is "that little monster that resides in every single individual." Part of our success in the market, he says, is learning when to give this little monster a little bit more room to operate and when to curtail its actions. "Every single event has two ultimate outcomes--either a win or a loss," says Velez. "Greed can make you gaze at the stars without having any consideration of the rocks below. It can prevent you from considering the fact that there is a downside and establishing a stop loss, or developing a systematic way of exiting or aborting a trade if in fact things don't work out."
Before you can control your greed, however, you first have to recognize when greed is operating within you. One of the signs that you are being greedy is when you have met all of your objectives in a trade, yet still demand more. This might include rationalizing why you should not exit a trade, for example. Sometimes greed will make its presence known before you enter a trade. For example, let's say you typically trade 500 shares. One day, you enter a play that is so fantastic you know it can't lose, so you decide to take a 2,000-share position. This is a sign that greed is operating, according to Velez. "I think anytime we are nudged or urged to so something outside of our normal behavior, we have to step back and check to see if in fact this urge has been driven by greed," he says.
According to Velez, to control greed you need to:
1. Recognize that greed is in play.
2. Have a trading plan and stick to it. A disciplined trading plan is one of the most effective ways to control both fear and greed.
3. Establish three prices before you enter a trade--an entry price, a stop price and a target price. Although these prices can be altered on occasion, if you extend these prices erratically, this is a sign that greed is controlling your trade.
4. Aim for singles, not home runs. The $1000 gains come quickly and with less risk than the $10,000 gains.
As traders, when we learn to control our fear and greed, we can take advantage of opportunities in the market as they present themselves, and benefit from those traders who can't control these emotions. Although this might be hard to believe in the middle of a bear market, when the market finally rallies, and it will one day soon, don't forget to keep greed under control. |
