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Understanding and Identifying the Impact of Greed when Day Trading

Understanding and Identifying the Impact of Greed when Day Trading
June 06
20:40 2011

Wikipedia defines greed as “an excessive desire to possess wealth or goods.” Greed is one of the most basic human characteristics. It is present in almost every day trader and is something they have to handle throughout the entirety of their trading career. Greed is expressed in many forms and is often hard to recognize because it can cause you to make and lose money. This article will help day traders understand what greed is and how to identify when it is in play.

Before you can understand how and when greed impacts your trading, it is important to know where it comes from. Most modern societies are fueled by an aggregate pursuit of wealth, also known as materialism. The idea that material wealth measures happiness, fulfillment, and success is one that is propagated throughout society. From birth, almost every human being is taught the value and influence of money. These societal influences create in each of us an attachment to money that is displayed in our trading habits.

One of the most common ways that greed rears its ugly head is in our decision making process when entering a trade. In some cases, greed can cause trader to either enter a trade prematurely or enter a trade after of the trend is already over. Have you ever caught yourself thinking, “Wow, this is thing is going up fast. I’m going to get in right now!” It is only after you get into the trade that you realize that the trend has exhausted itself and has subsequently reversed. This is a classic case of greed.  Most times traders can identify it when they find themselves getting into trades that seem to always go in the opposite direction.

Another common instance of greed is when day traders refuse to get out of a trade. Have you ever been in a situation where you were in a trade that was going against you and you simply could not cut the lifeline? Even the most highly skilled trader will have moments when he or she enters a trade and the market decides to give you a run for your money, only not in your favor. Greed will cause you to stay in the trade and rob you of the ability or willingness to just admit that you are wrong and get out of the trade. This inaction is especially costly when the market has given every signal that it is taking a new direction. However, instead of following the market, traders decide to add more shares to a losing trade. I am guilty of this act. Although there are times when the added leverage pays big, it can be devastating if the trade continues to go against you.

A very profitable trading day can easily be lost in one instance of greed. Every individual has different triggers that often lead back to an underlying attachment to money. The most effect solution to combating greed is to understand why it exists and to identify when it happens in your trading.

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One of the most common and destructive mistakes a day trader makes is to simply not follow their plans. Temptation, an “obvious signal”, and just simple greed can lead traders down the road of being undisciplined. This is without a doubt one of the most dangerous mistakes, as traders will often lose more than they originally planned as they raised their amount risked.

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