Greed, some say, drives us all to make more money. Not so, say researchers at State Street, who reported recently that investors who have a high love of money also have the worst financial outcomes.
The same is unquestionably true of traders who are driven by greed. Remember, ‘greed’ is not simply desire for profit – all investors share that wish. Greed is the love of money for its own sake, the need to have more, more, more…
Greed often drives stock traders to make some classic mistakes. For example, suppose you have a trade that is working just as you thought it would. Your strategy is playing out in just the way you planned it, and you are approaching the exit point. Now Greed steps in: Couldn’t you milk this trade for just a little bit more? Maybe you were too conservative with predicting the exit? So you keep the trade working even when it reaches the profit level you expected, and, more often than not…the trade goes sour.
Or, you’re having a pretty good day, winning with most of your trades. You’re about to stop, when Greed steps in: Why don’t you make a few more? You’re now going beyond your strategy, and you’re also probably tired and not thinking too clearly, but, with Greed in the driver’s seat, you still make those extra trades. And they mostly go wrong.
As the State Street study points out, Greed has another classic effect. Greed can turn you into a hyperactive trader, one who makes far too many trades to succeed. Driven by Greed, the hyperactive trader just can’t stop finding opportunities (even when they’re not there) and making trades. The result is usually good news for broker commissions, but not much result for the trader.
Greed is an emotional state, and when it drives your trading, Greed steers you away from all your thinking and planning to do things you shouldn’t. In fact, Greed can wreck your carefully planned strategy, and also push you to invest more than you can afford. This starts a spiral of fear and greed, as the need to recoup losses on money that you couldn’t afford to risk drives you to make more trades unwisely. Greed can have the broader effect of making you wait too long to save and invest, or to not save at all.
Which is why people in rich countries like Switzerland and Norway tend to be the least greedy. In the good ole USA, however, we score close to the top on the State Street Greed scale. This is natural, the researchers say, because caring about business and profit is part of our culture.
So, as a trader, you have to fight Greed. This means controlling your emotions, and there’s no better way to do that than to use a trading journal. High-quality trading journal software can make it easy for you to record all your emotions while trading. When you review the journal before making a trade, you can gauge how Greed has interfered with your trading in the past, and avoid making the same mistake.
A trading journal helps control emotions in stocks investing. Use it to cut Greed down to size.