You’ve probably heard of the “Four Horsemen of the Apocalypse”, while I’m not going to give you a “sermon” today, I am going to talk to you about the “Four Horsemen” of your trading account “apocalypse” and how to defeat them. They are the four emotions that influence most trader’s decision making in any market: Greed, Fear, Hope and Regret, and if you don’t thoroughly understand them and keep them under control, they will KILL your trading account, in shall we say an “apocalyptic” manner…
Let’s take a closer look at the “Four Horsemen” of your trading account’s “apocalypse” and how they work to influence your decisions in the market and how to control them instead of being controlled by them…
Greed is something we are all familiar with; it is the excessive desire for money and wealth (or other things). However, as it relates to trading, it can be more specifically defined as expecting an unrealistically large or quick profit from a trade.
Risking more than you know you should on a trade is the perhaps the most obvious way that greed negatively affects traders. You need to define the 1R dollar risk per trade that you are comfortable with potentially losing on any given trade, and never exceed that amount. If you start ratcheting up the amount you’re risking, you are being greedy, and it only takes one losing that you’ve risked too much on to do serious damage to your trading account.
When traders get greedy they may not even be aware of it. It often manifests as looking at your open profit on a trade and thinking about how much you’ve made and about how much more you ‘could’ make by keeping the trade open. Here’s the danger with this line of thinking: Open profit is just that, “open”, and you have not secured any profit from a trade until the position is closed. Unless you have closed a profitable position out, you really have nothing but the potential for profit. Traders often confuse the feeling that they get by looking at their open profit on a trade as ‘real’ money that they already have ‘in the bank’. Ignoring the fact that open profit is much different than ‘secured’ profit is the root cause of why traders do things like move their original profit target further away as price approaches it, which typically results in a much smaller profit than their original target would have brought them, or no profit at all. If you are greedy in trading, it has the ironic effect of making profits harder to obtain.
If you had a predefined profit target set at a 1:2 or 1:3 risk reward ratio, but as price gets close to that target you move it further away because you “think” price will keep going for an even bigger gain…that is greed, and it will almost always result in you making LESS than you would have if you just exited at your predetermined profit target. It can be difficult to exit a trade when it “looks good” and is in your favor, but most of the time, that is precisely when you should be exiting. Many traders hold trades too long, move their targets further out or set unrealistically large profit targets. All of these things are the result of GREED and they will all result in you making less money than if you weren’t greedy.
Greed can help you amass money in some areas of life, like if you are a “cheap” person who doesn’t like to spend much money…while this personality trait obviously has other negative consequences, it will help you grow your bank account over time. However, greed in the currency markets or in any investment / trading market will work against you most of the time and it’s something you must consciously be aware of and fight if you want to have a chance at long-lasting trading success.
Many traders struggle with fear at some point, and they also get abused by it. Let me explain…
Fear can be both good and bad in trading, unlike greed which is essentially always bad for a trader. Fear is an extremely powerful emotion, perhaps THEE most powerful of all emotions we experience. Fear of death and other consequences keeps us (most of us) from doing stupid things like driving drunk or trying to wrestle a crocodile. Fear is essentially a survival response, and this can be good if you were a caveman trying to escape certain death from a saber-toothed tiger. However, in modern day financial markets, fear can cause all kinds of problems for traders…
First off, fear of losing money can be both good and bad, you just need to find the right balance and not have too much fear. Fear of blowing out your trading account will cause you to place stop losses on all your trades, thus, in this regard fear is good for the trader. But, fear can work against us too, by causing us to not enter a good price action trade setup only because we are “afraid” of losing money, perhaps because we’ve just had a series of losing trades. The other main reason traders become afraid to trade is because they have been risking too much money per trade and have just lost more than they can stomach. Thus, there are two main points to be aware of that can help you curb the negative effects of fear:
1) Your last trade has no effect on your next trade. If you are following your trading strategy, you will have winners and losers scattered about in a random distribution. Thus, you should not let your previous trade results (good or bad) influence your next trading decision.
2) You must find a dollar amount that you are comfortable with risking per trade. If you are risking too much money and gotten burned a couple times doing so, it will quickly cause you to be afraid of the market.
YOU have the power to control your own fear in the market. You should be a little bit afraid, because you can lose all your money if you let the market take it. But, the great part is that if you are aware of this and act accordingly, by properly managing your money and sticking to your trading strategy, you can find the right amount of fear and not let excessive fear derail your trading efforts.
Also, listening to news and economic reports (fundamental analysis) can induce fear into traders’ minds. News can cause traders to rationalize why they should close a trade or enter a trade, regardless of what the price action is saying. This is very wrong. The price action is all that really matters, and anything that can affect a market will be reflected in its price action, so following news reports and analyzing them is really a waste of time that can easily cause you to become fearful for no reason.
Hope is dangerous for traders. It can be hard to understand this one, because ‘hope’ is usually thought of as a very good thing, and it is in most instances, just not in trading.
Hope is essentially the expectation that something will happen or a strong desire for it to happen. When traders trade with “hope”, they often ‘hope themselves’ right of making money. Hope can cause traders to move their stop losses further away or delete them all together because they think the market will turn around in their favor, allowing them to avoid the losing trade. Hope works in tandem with greed when traders hope for an unrealistically large profit and move profit targets further out. This typically ends up with the trader taking a very small profit because they never take the profit when it’s at a decent dollar amount in their favor, because they “hope” it will keep going and going.
Hoping that every trade you take will be a winner is foolish. When a trader “hopes” for a winning trade they are also expecting a favorable outcome, and this sets them up for whole host of emotional trading errors because when you expect something to happen and it doesn’t, it typically makes you sad, angry or regretful. It is much better to simply take a realistic view on every trade, and that means understanding that whilst you might have an effective trading strategy, that does not mean every trade will be a winner. You will have a mixture of winners and losers, and hopefully, over time if you manage your money properly and do not over-trade, you will see the “edge” that your trading strategy gives you, pay off. Thus, it would make far more sense to “hope” for a profitable trading year IF you follow your strategy and implement consistent discipline in your money management, rather than “hoping” that every trade is a winner, because then you are hoping for something that is not realistic.
Regret is the feeling that traders often feel after a losing trade or a missed trading opportunity or perhaps after not making as much money as they hoped they would on a trade…possibly due to greed and fear, as we discussed above. Regret can slowly destroy your trading account……
From the emails I read each day, I know that many traders focus too much on past trades and “what if” scenarios. Something that you need to understand is that NO two moments in the market are exactly the same, thus it’s mostly a waste of time to stew over lost trades or that you didn’t make as much money as you could have. You can’t change what happened on your last trade, all you can do is evaluate what happened and try to take a little something away from it and move on. It is far more important to be focused on the “now” of the market rather than the past, because the market is constantly ebbing and flowing and it does not care how much you made or lost on your last trade.
Regret also causes traders to “chase” trades by jumping in the market after a setup has already triggered. This gives them a far worse risk reward potential on the trade which makes it a lot harder to turn a profit on the trade, chasing trades is not how a skilled and patient trader behaves. Instead of being regretful over missing a trade setup, the professional trader will simply remain calm and observe the market, learn a little something, and keep his or her hands in their pockets until the next trade comes along. Chasing trade setups is a VERY slippery slope to forgetting about your trading plan and kicking off the process of trading randomly or gambling in the market.
Conclusion: How to defeat the “Four Horsemen”
Since we are human, we are all susceptible to the same types of emotional trading mistakes, and the ones I’ve discussed in today’s lesson are the most common. To effectively battle them, the first step is being aware of them and their implications, which you’ve learned here today. The next step is to catch yourself “in the moment” and consciously become aware that you are being greedy, afraid, hopeful or regretful, and then quite frankly, kicking the emotional enemy in the ass.
Tackling your emotional trading enemies takes effort and patience; there’s no ‘free lunch’ in trading, and being unaware of this fact is perhaps why a lot of people fail it. If you make an effort to become more self-aware as you trade and gauge how you are feeling and consciously try to control how those feelings affect you, you will be far ahead of most traders. I cannot force you to do these things or pay attention to what I’ve said here today, but I can promise you that if you work to fight these “Four Horsemen” that are killing your trading, and combine that battle with effective trading strategies like those I teach in my price action trading course, you will avoid a trading account “apocalypse” and put yourself on the road to a successful trading career.