The inner structure of greed

“You shouldn’t be greedy”, we are told from childhood. Greed is considered a moral weakness, and greedy people often evoke a sense of disapproval or even repulsion to others. Nevertheless, the more we are told to control a specific desire, the more we find the object of desire attractive; the more we realize it’s difficult to establish control. In trading, fear and greed are the main emotions that run the markets, with fear ranging from low-grade apprehension to intense panic and greed often causing the famous state of irrational exuberance that drives market bubbles.

Greed impacts individual traders in various ways

For individual traders, greed can cause multiple issues and lead them to:

  • Take unplanned trades, just because they had a recent winning session or because the markets have moved towards their predicted direction.
  • Run winning trades longer, beyond their take profit levels, hoping that they can make more profit.
  • Impulsively increase position size, contrary to their trade plan, disregarding their previously set levels.
  • Trade during a highly volatile day that is packed with data releases, just trying to ride along “big candles”, without any established news trading strategy.
  • Hedge losing trades without proper planning or an understanding of correlations, often by opening trades for the same instrument towards the opposite direction.

The problem with greed is that it will throw you out of the trading game before you even realize. Greed can seriously jeopardize your account and eventually reduce your confidence in trading. Greed also breeds other emotions like anger and vengefulness, when things don’t go your way. If you want to keep trading, you have to address greed, and this is much more complex than just saying to yourself “don’t be greedy”.

Deconstructing greed

Unfortunately, it seems that our brain is wired to be greedy. So, even if you don’t want to be greedy, you may often be. How is that so?

It all starts with dopamine, our brain’s pleasure neurotransmitter. When we do things that our body perceives as assisting its well-being, such as drinking, eating, laughing, having sex or making money, dopamine is released in our brain pleasure pathways leading to a state of euphoria. The euphoric feeling that we experience, reinforces us to repeat the particular act.

The mechanism of addiction is strongly related to dopamine. Recreational drugs can raise dopamine levels much more than any other normal reward. Cocaine, for example, increases dopamine 2 to 10 times more than food.

The science of compulsive desire

  • 1. Apart from the pleasure of consumption, the pleasure of anticipation also increases dopamine levels. In other words, dopamine is related to wanting something rather than just liking it.

Animal studies have shown that when scientists gave animals a shot of juice, their dopamine levels increased, as expected. However, after multiple shots of juice, the increase in dopamine occurred before the animal drank the juice. It seems that the animal learned to associate certain stimuli, such as sounds, as predicting the consumption of juice, and every time this cue appeared, the animal’s dopamine levels spiked.

The same principle applies to humans. We appreciate cues that predict pleasure- so when we get a cue that there may be a money-making opportunity around, our dopamine levels spike.

  • 2. Repeating the same pleasurable act/consuming a pleasurable food eventually causes no spike in dopamine. Our brain gets accustomed to the reward. Therefore, the amount of the reward is not important; what matters is how unexpected it is.

Offering the animals, the same amount of juice eventually produces no increase in dopamine, however, once the juice is doubled, dopamine levels spike again.

As it is evident from the above, the same amount of anything will never produce the initial satisfaction that we experienced when we first tried it. For dopamine levels to keep rising, there must always be a difference, usually, an increase that our brain perceives as unexpected.

Greed then could be conceptualized as excessive desire which becomes stronger by an element of chemically-based compulsion, and which is insatiable.

Greed

How does this apply to trading?

When traders make a profit, they experience a spike in dopamine and therefore a euphoric feeling. To maintain the euphoria, traders must always go for more, as the same type and level of reward will soon produce no euphoria.

It’s like drugs- the more you have, the more tolerance you build to the substance and, in order to produce the initial high, you must double or triple the initial quantity.

It seems then that greed in trading may have a compulsive nature. You are going after the feeling of euphoria that you experienced when you made money, and the more money you make, the more you need to keep making to sustain this feeling of well-being. Making the actual profit is not even a necessary condition to have your dopamine levels spike. The mere anticipation of profit can release plenty of dopamine in your brain and start a cycle of compulsive wanting.

How to “tame” greed and master your trading ability

By now, you may have realized that it’s more natural to be greedy when it comes to the anticipation of large rewards, than not to be. Therefore, being greedy is fine, and for our brain to be made like that, there may be something positive about it as well.

To deal with your greedy side,

  • Start by cultivating awareness. Awareness is not an easy task, as a lot of our thoughts, emotions and actions are on automatic pilot. A great avenue to acquiring awareness is to recognize the embodied sensation of your emotion. Simply put, when you start realizing that you are in the mode of compulsive desire, ask yourself: “Where in my body do I feel this desire?”, “Where in my body does greed reside?”. You may decide, that greed sits in your stomach, for example, and that it makes your body muscles tense as if you are preparing to perform an action.
  • Take note so that next time you start feeling this particular sensation in your body, you know that you may have gone into the territory of greed.
  • Practice non-attachment. The more attached you are to the outcome of your trade, the more you are going to experience emotions such as greed or fear. Cultivate the attitude of caring less- as if the purpose of trading wasn’t to make money but only the execution of your trade plan.
  • Believe that the compulsive desire of making money has very little to do with making it. It’s not because of desire that you succeed in trading, but out of setting the right intention and executing your goal plan.
  • Be ok with losing, failing, having a bad day or a day with not many opportunities.
  • Know that the better you execute your trading plan, the longer you will stay in the trading game. There is no point in making massive profits today and losing them tomorrow. Proceed with determination and tenacity, and pay attention to strengthening your trading performance through education and constant assessment and improvement of your weak points.
  • If you are confident about the strategy, practice live trading, even if you recognize that you may get greedy at times. There is no way that demo trading will help you to learn better emotional management, as only live market and real money can test how well you respond to the emergence of your greed.
  • Remember to always be aware of our body’s innate tendency to seek pleasure and avoid pain, and trade as if you are executing a step-by-step task rather than for profit-seeking.

 


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Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.