If you have read previous articles written by me and the Lesson from The Pros team, you know that we all drive home the need to follow a rules-based trading and investing plan. Not only does this make our decision-making process easier but also frees up time and, more importantly, our emotions. The less the trade becomes about us and the more about our rules and trading plan, the more we have steered ourselves towards achieving success in the markets on a consistent basis. The trading plan tells us what to do, as opposed to us looking at a chart and guessing what we should do. There is a big difference between basing our choices on logic rather than greed or fear. Ask yourself how many times you have noticed that difference in the choices you have made in the past, and how that eventually worked out for you?
Controlling emotions is perhaps the toughest obstacle we face in making our goals a reality. Every single time a candle on the charts turns green or red, we can be easily tempted to click the buy or sell button on a whim, without any real reason to be entering at all! In the early stages of my trading education, I remember reading that candlesticks and trend on a price chart are nothing more than simply a representation of people’s emotions when they buy and sell. Rising prices show greed in the markets, and when prices are falling it is the fear taking over…or so they say. More than 15 years later, I now see fear and greed from a different perspective and I would like to share that with you.
Here at Online Trading Academy, we help our students to change their mindset of the how markets work, to get them thinking like those who consistently make money in the markets, mainly the institutions. The divide between the way most retail traders act when they place trades and how some of the biggest banks and funds act when they speculate is vast. Think about this for a second: when a fund manager places an order to enter the market to take a position, do you think that they are worried about losing the trade and how it will make them feel? Or do you think that they find it easy to pull the trigger because firstly, their superior has already given them their risk parameters and secondly, because the money at risk is not actually theirs? Taking the trade is nothing more than their job and they are getting paid for doing that job, likely with a nice performance bonus attached to the salary.
On the other hand, let’s think about the retail trader sitting at home and taking the same trade but with a much lesser size. For a start, the retail trader is trading with their own money, not somebody else’s money, meaning that whatever the outcome of the trade, it will directly impact them. Secondly, the retail trader has no guarantee of an income at the end of the month, unlike the fund manager or trader who works for an institution and will no doubt still earn at the end of the month if they follow their instructions and trading plan as outlined to them by their superiors.
We must all understand that the different environments which retail and institutional traders work in also dictates the challenges they each face. I do not believe that the emotions of fear and greed work the same way for the small trader as they do with the larger trader. In fact, I would go so far as to suggest that greed does not even become a factor in the potential success of the retail trader, because if you ask most people who want to trade for themselves what they want more than anything else in their trading, they will normally say is consistency. They just want to be able to achieve their goals with low risk trades and slowly build upon this. It does not become about greed at all. It is the fear which tends to be the biggest challenge of all. The fear of loss, the fear of failure and the fear of not being right.
It is fear which stops us from taking a solid setup in the markets because we have been on a losing streak, only to see it work out well and the opportunity missed. It is fear which causes us to not follow the trading plan to the nail and make irrational changes all the time because the odd trade fails to work. It is fear which causes us to get out of a trade far too early with a small profit because we are scared to hold on in case it becomes another loser, and it is fear which makes us search over and over for the fool proof strategy (which does not exist), simply because we think there is always something out there we are missing out on or don’t know about.
Fear is the biggest hurdle any retail trader must face and it will hold you back more than anything else ever will. Recognize that fear needs to be controlled with a trading plan and discipline. Once the consistency comes, then the fears will subside over time. Oh, and for those of you who were wondering what I feel about greed’s place in the market, well that is an easy one. Just ask yourself a quick question: Why do people become greedy? Because they are fearful there will never be enough…