Keeping Greed and Fear under Control Do not Fight the Market

An English trader once wrote that humans are naturally unsuccessful traders because greed and fear are inherent instincts. Just as army training makes a person a soldier and scientific study creates a scientist, trading in the stock market is an art that requires constant practice and emotional control.

Two emotions that can make a trader unsuccessful are greed and fear. Let's see how.

When in a profitable trade position, the desire for more profit can take over, but then the profit starts to diminish. Greed prevents you from applying a stop-loss, resulting in a significant loss.

Next time, fear takes over. Upon seeing a small profit, you decide to book it immediately, fearing it will vanish, missing out on potentially larger gains.

To teach control over these emotions, it is suggested to keep a target of 1% profit and a stop-loss of 0.5% for trades.

Once you find yourself in a winning position during the day, you can raise your profit target and stop loss. For example, if you trade 10,000 each time with a 100-profit target and a 50 stop-loss, and out of your first 7 trades, 5 are successful, making 500, while 2 results in 100 losses each, you have a net profit of 400. In this scenario, even if you take new positions with a 2% profit target and a 1% stop-loss, you are unlikely to end up with a loss by the end of the day.

Generally, control your greed and fear and maintain a 2:1 ratio between profit and stop-loss. Start with low-profit targets and even lower stop-losses. As you gain profit, gradually increase your profit target and stop loss for the day to ensure you don't wipe out your entire day's profit.

Emotions like greed, fear, and ego should be avoided by a trader.

To become successful, trading should be approached like a robot, devoid of emotions. Mixing emotions with trading can lead to losses.

This lesson is illustrated by the story of Lala Raman. Lala developed a trading strategy where he would treat the previous day's closing price of a stock as a base. He decided not to take any position until the stock moved below that base price, at which point he would take a short position. This strategy worked well initially, and Lala made significant profits by shorting stocks that fell below their previous day's close prices.

Encouraged by his success, Lala doubled his margin money the next day and continued with his strategy. He took 'buy' positions when stocks moved above their previous close prices and 'sell' positions when they fell below. Again, he made a good profit.

On the third day, Lala increased his margin money further. However, that day, the market experienced high volatility, first falling and then rising sharply.

Lala took short positions for stocks that moved below their previous close prices, but the stocks quickly rebounded and closed higher. He suffered significant losses.

Lala, driven by ego, believed his method was not wrong but that he had failed to set a stop-loss. He decided to continue his strategy but with a stop-loss at the previous close price. To recover his losses, Lala planned to take a long position with double the quantity if a stock moved back above the previous close price after falling below it. He expected the double profit from this position to offset his loss from the stop-loss.

Many traders who have lost money by fighting the market might relate to Lala's story. It highlights the importance of not frequently changing strategies on the same day.

Remember, no strategy is 100% correct. If you do not make money in the market on a given day, remember that the market will open again the next day. Keep your stop-loss and profit targets fixed, and maintain control over your ego, greed, fear, and anger.