Greed is Bad

Remember that infamous speech given by fictional character Gordon Gekko in the Hollywood movie "Wall Street", made back in 1987? The take away from that speech was that "Greed is good".

Well fact is, greed will get you killed. It's always been that way. Now it's difficult to objectively determine whether one is, in fact greedy from one moment to the next but in the world of trading, it's that voice in your head that convinces you to drastically increase your risk in hopes of making bigger profits. This can work for a period of time but inevitably, once you take some losses, panic sets in and in most cases, risk is yet increased with the absolute belief that brighter days are around the corner and you must now make up what you recently lost... and there we go down the rabbit hole.

I read a trading book that once spoke of a man who turned $10,000 into $1.1 million in two months. Every time he won a trade he would increase his risk. Each time he lost a trade, he also increased the risk. He was trading in a trending market where he was winning 75% of his trades. What do you think happened when the trend was over and price action slowed? Well, he started taking large losses and after each loss, what do you think he did? Well he made bigger bets thinking his previous performance would be mirrored the second time around. Well in about 1 month, he was back to $10,000 and became enraged, blaming the very system he used that previously grew his account exponentially.

Markets trend and then they slow. It has always been that way. When you win or lose, move on to the next trade with a level head and keep that ego at bay. In the long run, you can make a lot of money and become wealthy. But it takes time. Brick by brick you will build that castle but don't try and take shortcuts in trading. You will be left with nothing, with a confused look on your face.

Money management/risk management is probably the most important aspect of trading. Realizing and calculating how many times you win compared to how many times you lose and at what amounts, allows a trader to understand how much he or she should risk on each trade, and then when to gently increase those bets, while keeping risk the same. That way, win or lose, in the long term you understand you should be okay. Also, this allows you to understand the big picture. Medium growth is so much more sustainable than fast growth.