Greed is one the Seven Deadly Sins taught to us by our elders… but does this apply in trading too?
In this episode of 2Traders Podcast, Walter and Darren talk about greed, how this affects your trading, and when should you — or should not — let your self fall into it. Darren and Walter also share some good tips on how you can avoid it and the importance of keeping yourself in check whenever you trade.
You will also find out how yoga, meditation, and recording softwares can help you become a better trader.
Download (Duration: 23.04 /26.4 MB)
In this episode:
00:28 – greed: when to hold and when to fold?
02:30 – blown it away
05:05 – market is always fluctuating
06:32 – take a pause
08:39 – continue trading
11:13 – business as usual
12:39 – how to know when greed is creeping in?
14:03 – greed affects your decision making
15:31 – out of whack
17:13 – over confident
18:50 – pause button
19:27 – meditation
20:18 – journal thing
21:49 – trading buddy
Greed is one of the main problems that people have. [Click To Tweet].
Stopping when you’ve made good profit is not bad. [Click To Tweet].
Overconfidence can lead to real errors. [Click To Tweet].
Darren: Stopping now if you’ve made good profit is not a bad decision to make…
Announcer: Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Welcome to the Two Traders Podcast. I’m Walter and Darren is here. Hi, Darren.
Darren: Hi, Walter.
Walter: We’re going to talk about greed today, when to hold them and when to fold them. What I think about this, the one thing that comes to mind to me, Darren, is I’m always using…And I’ve done it a few times actually in a webinar to show people exactly how this works and it seems to be always at that point.
If you’re watching, let’s say, one-minute chart or tick chart or something like that where it’s moving quite fast, it’s at that point where I ask the audience “Okay. Now, everybody here, tell me when you’ve decided when you know the direction of the market here.”
A lot of times, for example, the EUR/USD keeps going up, up and up everyone says “Okay, now is the time to buy. It’s on a strong uptrend”. That’s usually the point where it turns around and collapses.
I think of this a lot when I’m thinking of greed. I like to look at the open position ratio. A lot of different brokers have this. I’ll put those links down there on the shownotes for you so you can see what the retail traders are doing. That’s a really good tool, too.
It tells you what everyone is doing because these sort of things looking at a certain point –if every one’s bought, if eighty-seven percent of the market has bought the EUR — there are no more buyers.
The EUR is going to come down. These are the things I think of when I think of greed. I think of debt bubbles and I think of just really ecstatic irrational markets where everyone is pounding in because it’s the next big thing.
I remember when everyone was sure that the EUR was going to a seventy five USD or whatever. These sort of things come up when we’re talking about greed and how to know when to hold them and how to know when to fold them, to quote Kenny Rogers. What do you think of Darren?
Darren: The reason I mentioned it this week is because a trader that I’ve been following recently. He’s doing really well and for the last two weeks, he started the week really well and blown it away, blown it out at the park one loads of money but then at the point where he could’ve said “Okay.” Like you say, the market has moved a lot. “I should just close shops for the week, or not even close shop. I should be thinking of protecting those profits I’ve already made.”
He continued on oblivious to that and then pretty much giving it all back. He said to me, “I know what’s going on here. I got greedy”. He would say to himself, “I know after the strong move, it’s likely that there’s going to be consolidation”.
That sort of greed, or if you like that fear of missing out of more or having a really amazing week, in the end, is costing all of his profit. It’s something very difficult to do, something I’m trying to teach traders at the moment is this notion of when you’ve made a lot of money, there is nothing wrong with having a break.
If the next day it does move and you missed out on a bit of profit, that doesn’t matter as long as you’re consistent over the long term. Greed is one of the main problems that people have.
I wonder if we’ve discussed it before, this idea of trading to a target. It’s particularly suited to the way I trade and not necessarily to the way you trade. You’re waiting for specific conditions when you’re most likely to get successful trade whereas, I’m trading in all market conditions.
Would you ever consider it? Let’s say, you just had an amazing run and presumably few target amazing run and price needs to move very strongly in one direction, would you ever then say “Well, greed is evident in the market and I’ve made a lot of money. Maybe I should adjust what I’ll do next based on that?” Would you just trade the strategy regardless?
Walter: That’s an interesting question. I was wondering some of the things you might suggest like, I guess, the obvious is stop being don’t-trade-anymore. If you have to trade more, take really small positions. That sort of thing.
The way I see the market is it’s always fluctuating. If you’re not in consolidation, let us just say, we’re not in consolidation so we’re not in an arranged bound market, however tight or loose that range maybe.
If we’re in a trending market, I expect that we will see strong trending moves followed by retracements. The only thing that would suggest that’s not happening to me is I brace for retracement.
For example, if I’m in a trend trade and it exploded in my direction down or up, doesn’t matter, and now it’s time for it to rest. Now, it’s time for it to pullback and I would expect that to happen.
The only thing that would get me to a point where I might be concerned is if it were to pull back and erase the entire leg of the last trending move. Does that make any sense?
Darren: Yes. Other than that, just retracement with movement… That is what I’m saying. Essentially, the way I’m trading is — you’re always in the market. At the same time, like you say, when the market moves very strongly, there’s greed there in the market. It becomes over extended and it’s highly likely that it’s going to take some pause.
What I’m saying is if you’re lucky enough to start the week and be straight into the strong move then it’s quite rational to say “well, it’s much more likely now to consolidate than it is to continue”. Stopping now when you’ve made good profit is not a bad decision to make.
That goes against my whole trading strategy in saying that you shouldn’t analyze your entries and you should just take the mole. At the same time, you use that little bit of context of degree and movement in the market.
You should include that ‘cause you’re not really saying “Look, I know what the market is going to do next”. What you’re saying is “Hey! Look at that. It shall start off the week.” There’s no harm taking a couple of days off and start again next week or whenever.
Walter: What do you suggest? Do you suggest that people stop trading at the target? Or is it if you want to continue to trade, you just reduce your position size? How would you? Assuming that you’re in a trend, and you’re trading the trend, I would expect that pull back and consolidation to happen.
The only thing that would make me reconsider would be if it would retrace the entire move that it just made so that the entire trend burst. If one hundred percent of that has retraced, then I would say “Okay, let’s reassess here. Maybe we’re going into consolidation.”
Otherwise, I would just continue onward and look for the next signal in that direction, that trend direction. I know you’re big on targets. Do you suggest that any trader who’d simply can’t sit tight once they’ve hit x number of pips or USD or whatever their target is?
Do you suggest that they maybe take the third of the normal positions so they can still be in but not completely obliterate the week’s earning? How do you do that?
Darren: Perhaps continue trading but perhaps say “Well, I’m going to continue trading but I’m only going to give x amount back and if that happens then I’ll call it a week.” This is something I suggest, “This week trade the same strategy on the daily”. So, if you call it a week on your intraday, sixty-minute chart trading, then you can still continue to trading on something that it’s not going to be governed in same way in the intraday.
What I’m talking about is intraday trading. I suppose, it is a bit of analysis of the market and how it moves. That’s something that I’m kind of anti but, again, I’m open-minded to whatever works.
How often do you see five strong moving days in the week? I’m thinking about what happens more times than not with all of my trading ideas and I’m thinking what’s happening all of the time.
Like we’ve been saying, you tend to get like a strong move consolidation. Perhaps, two strong moves of consolidation then two days of consolidation. It’s randomly distributed. The one thing that you very rarely see is strong move after strong move, after strong move. In my eyes, that’s the least common occurrence. Why trade as if that’s the environment you’re in if you know for a fact that you’re not?
Obviously, sometime you’re going to start the week and go have two days consolidation and now you have made losses. If I’ve made losses, I want to try and win those back. Again, I’m thinking the other least likely thing is for it to consolidate all week. It does happen. It’s a bit of analysis of market movement and then degreed element placed into that.
Walter: My question is if you have a week that is choppy in the beginning, and not doing so well, does that mean that you will: a.) increase your position size on subsequent trades; b.) maybe take a step back and say “what’s going on here?” — maybe there’s a news that you haven’t wanted to pay attention to but maybe you should — or; c.) just business as usual?
Darren: When the week starts badly, I would just continue trading in my noble manner because I know, I pretty much get two bad days every week. If it happens to be Monday, Tuesday, then in my mind that increases the chance of Wednesday, Thursday actually moving. I suppose you could argue that, really, I should up my position size.
At the same time, I’ve had the context of “I’ve already made losses this week, I don’t want to compound that.” I don’t want to let my losers run, if you like. I suppose if I’ve got to Thursday and it wasn’t still moving, I might call a week then just say “ look, it’s been a terrible week, I’ve lost a load and just going to call it quits, clear the desk, clear my mind, and come back on Monday.”
Certainly, after two losing days I wouldn’t so. I suppose this is experience, this is my personal experience of trading and I’m taking that and adding it as analysis into my trading.
Walter: Right, I see. What would be the signs of greed? If I were a trader and I wanted to know “Alright, how do I know that greed is creeping in?”
One thing I would point to is are all the people around you — so all the traders that you interact with in the internet — is everyone thinking the same thing? Because if everyone is on the same train, that to me is a warning flag. Everyone is buying google stocks because it’ll go to the moon.
These things can come into play here. It’s related to the open position ratio that’s linked up in the shownote of this episode down below. Where you can see where those are with different brokers. That’s a big one for me and I feel like when you get really, really confident in a situation — it might be a trade, might be a market — that often also means that you’re due for a pullback or a turn around. To me, those are red flags.
Darren: When you continue to do something when inside you’re screaming to yourself, “You shouldn’t be doing this! This isn’t the right decision to make,” but you still go ahead and do it then you repeat that maybe the next week or the next day. You do exactly the same thing you did the week before. That is a pretty clear indication that the emotion of greed is really strong on you. It’s likely to affect your decision making.
That could come through maybe keeping a journal or making some notes when you’ve had a bad week. It may seem pretty obvious if greed is something that affects you strongly.
Walter: Yeah, that makes sense. I guess it’s hard, I know, for some traders — the counter trend traders, the traders who want to find those points of no return — they really want to hook into turning points. They love this. They love the idea of greed.
They’re sort of contrarian, aren’t they? They’re saying “Look, this has gone too far. The market is going to snap back.” For example, if you trade with the Bollinger Bands and you trade some reversion to the mean or something, you’re probably doing something like this.
If you’re a swing trader looking for swing points, basically, what you’re saying is “Look, this is out of whack, the market has gone too far. It’s shown now it’s hand reversal signal and I’m going to go ahead and jump in on this. I’m going to find the exact turning point. This is going to be sweet”.
That’s another thing. If you’re listening to this and thinking “I never do that, I never feel really greedy” maybe you’re one of the traders who likes to trade a reversion to the mean or a pullback, a swing point. You’re kind of that counter trend trader. This is good for you that the market has got out of whack.
People get to be really, really greedy and pile along. I never forget… I’m pretty sure it was 2003 when the EUR made this triple top around one point nineteen thirty and it hit this level three times in over a course of couple of weeks.
I was sure that the third time it went up that was the breakout because it hit twice already. I was sure that it could be a double top so I bought it at one nineteen fifteen and it went up to one nineteen thirty six. I was feeling good about it and then over the next couple of weeks, it unravel and roll it like one o seven.
The point is I got caught up in that emotion. This was back 2002, 2003, were really good for the EUR. It was just marching and it was the easiest market I’ve ever seen where you would just pick it, pick a point and just go.
I was sure that this was the breakout that the double top had failed and this is going to break higher. In fact, it have made sort of triple top and it collapsed on me but these are the things that you keep in your mental index as a trader. What it feels like to be in the greed, in that mode?
Darren: It’s worst when you’ve had a really good run as well and you seem to be more susceptible to greed, then. When everything’s been going well, you can’t put a foot wrong. It’s just like it’s the time that is going to take over you. I suppose, it’s a kind of over confident thing as well.
Walter: Yes. You’re exactly right. That’s exactly what it is. That actually brings up a good point because if you’re sitting here listening to this thinking “How do I measure this? How do I know?”. When you look at other traders doing with the open position ratios but you can also measure yourself, can’t you?
You can do things like when you write down in your journal, you can do things like “How confident do I feel in this trade; or how confident am I in my trading today?”. Just overall “how am I feeling?”
If you track that in some sort of spreadsheet or chart it as in line chart over your trading career, what you’ll probably find is that you make your most severe mistakes. Actually this is a good idea. I think I’m going to do this. You make your real errors during those periods when you’re feeling overconfident.
Darren: Definitely. You need to take emotional stuff as well and see where your emotions are on the graph. How much each of the emotions are at work in the background now and affecting your decisions.
It’s quite difficult to do and like you say, you do learn that as you go along. The people that do start to pick up on that seemed to progress really quickly. You get to the point where you can just stop yourself and say “hang on a minute here. What am I doing? Am I making the right choice here?” So much like a pause button in it before you act.
Walter: Exactly. A lot of people do this when they make major life decisions,. They’ll just write down pros and cons. They’re basically pausing, thinking about it, rolling it around and really kept trying to make sure they make the right decision. Some people don’t do that. Some people just go with their gut. Whatever comes in they got “Okay, this is what I’m going to do.” Some people will pause and really roll it around and play with it a while before they’re sure of what they’re going to do.
If you’re listening to this, looking for tools and in a lot of ways, just being quiet meditation, just being by yourself at noses or whatever you might want to call it. That sometimes helps because you become more aware.
It’s almost as if you now have this outside of observer who’s watching you as you act and you can see yourself from that angle. Whereas, normally we don’t see ourselves from that point of view, not often enough.
If you spend some time quiet, it becomes a little bit easier to become aware where you are at in your everyday life and certainly in situations like this where greeds starts to take hold.
Darren: I should really explore meditation. I know a few trader who use it and they say it’s really helpful for them. You’d think with all of the time I spent entirely that I would look in the meditation thing. I know quite a few traders who really think it helps their trading but it’s a little bit out of my comfort zone for some reasons. I don’t know why. I need yoga as well.
I’ve got a lot of friends who do yoga and they say “Wow, it feels so much better”. Again, I keep saying to myself, “Next time I’ll be in Thailand, I’ll start doing some yoga”. I never do. I need a little push.
Walter: Yeah. Maybe the journal thing is really… maybe that’s your kind of mode. Maybe writing is the way to do it for you.
Darren: My trading actually is quite hectic. I have a lot of other things going on when I’m trading. They’re trading related and it’s almost like I’m having my dialogue with other traders. I’ve kind of telling other traders what I’m doing. Maybe that is my way of saying it out loud. This is what I’m going to do now, this is why I’m doing it. I’m saying this to other traders. Maybe that really is just me internally going through it and considering my actions.
Walter: Yup. There’s a lot to be said for that. That’s especially if you’ve been doing in a long while, it’s one of those things that allows you to become aware of what you’re doing. Otherwise, you just don’t see it that way. It’s not really that conscious.
For people listening to this, that’s also the reason why you might want to have a trading buddy. If you can talk about the trades that you’ve taken, even if it’s post talk. I know it’s better if you do it during the trade but if you have a trading buddy that you speak to every week or even if you just record your own trade, recording software’s so cheap now.
You can literally pull up a mic and a headset mic,record your thoughts as you take the trade, as you manage the trade and as you close the trade. Just having that record, that sort of a journal of talking out why you’re doing things can be super valuable when you go back and look over these at the end of the month or when you speak to your trading buddy.
These sort of things can be really, really useful. You’re right because a lot of traders who’s been doing a long time, they’re not just being aware what they’re doing until they do something like sit down and explain it to other traders. That’s something that might help people as well.
Darren: Yeah, cool.
Walter: Alright, thanks a lot, Darren. I really appreciate this session. I look forward to seeing you next time.
Darren: Okay. Thanks, Walter.