Manage Greed And Fear with Simple TechniquesTwo serious problems in trading, which each one of us has faced at one stage or the other -- Greed and Fear. Most of us are still struggling with these issues.
According to Wikipedia Greed is an inordinate or insatiable longing for unneeded excess, especially for excess wealth, status, power, or food.
Simply put when the trader do not take profits at predefined targets and wait for more, he is getting greedy. Many a times such trades reverse and either the whole profit is gone or the trade becomes negative. Once burnt twice shy, besides other factors, greed also breeds fear.
According to Wikipedia Fear is a feeling induced by perceived danger or threat... which may cause an ultimate change behavior.
In trading it is the fear of loss which hampers performance. Many a times best opportunities are missed due to fear and sometimes fear induce us to get out of a trade too early. As the stock approaches the stop loss, the fear factor orders our brain to get out before (that carefully predefined) stop loss level is hit.
It is said that practice makes us perfect and there is nothing wrong in it. But it would need years of practice before we are perfect in managing greed and fear.
I am hereby giving very simple techniques which we may practice every day without even getting into a real trade. Basically these techniques are brain exercises which may improve our cognitive functionality.
We may call this technique TRAIN YOU BRAIN .
The basic idea behind these exercises is that the motivation to think stimulates motivation to do .
The Exercises:
First we should sit in any relaxed position in a quite environment and do simple breathing. Close your eyes and just concentrate on your breathing as you inhale and exhale. It's important not just to breath but to feel it too.
Do the above exercise for 3 to 5 minutes (or higher if you want to). This exercise will prepare the ground for the next main step of the exercise.
Now keep your eyes closed and imagine your favorite setup on your favorite time frame. It could be triangle setup; a flag; a moving average setup or any other which you think can be reliable for trading. I would suggest not to imagine more than two setups.
Imagine a stock has made your favorite set up and you are ready to trade it. You know your profit targets and stop loss.
In the first attempt let the trade go in your favor. Always and always take profits at targets or trail as you like. When this imaginary trade is finished, repeat this process with the second setup. Do not go too far with your imaginations, I mean do not imagine that you took a stock at 200 and sold it at 500 on same day. I don't know why but It reminds me of the Inception movie :D
When we say a setup, there is a fixed target to that set up and there is a fixed stop too. So dun let your imagination make you a millionaire on the same day.
Repeat the above exercise, in which trade goes in favor, four times..two times with each setup.
The advantage of this exercise will be that the brain will be trained to take profits at predefined targets and you will be able to manage a profitable trade in real life.
When it's done, on fifth attempt let your favorite setup trade go against you. Let it ultimately hit the stop loss and you suffer the loss. Remember not to exit the trade before that setup stop is hit. Repeat it with your second setup.
Repeat the above process 6 times, means 3 times with each setup.
This exercise will help in managing fear of loss, which is perhaps a greater enemy than greed.
The combination of these two brain exercises will surely help you in overpowering greed and fear and hence improve trading in real life.
I suggest you not perform these exercises during market hours. For better results, do these exercises in the evenings or in the morning. Rome was not built in a day so do not expect extraordinary results overnight.
