Greed and fear are very strong forces in forex trading, that impact all forex traders, even the most seasoned ones.
Here is how greed is seen in forex trading, and how you can take advantage of others’ greed.
Enlarging Position Sizes
After trading for some time, you begin feeling confident. Greed creeps in and you enlarge your positions in order to make more money. Risk? What risk? You neglect the larger risk as you only see the larger profits.
This is the fast lane to erasing your account: many traders tend to enlarge their position sizes at a disproportionate manner, at sizes that are much larger than the profit that they gained in their accounts.
With money management rules forgotten, liquidating the account can happen within a few bad trades.
Holding on to a position for too long
You carefully planned your trade and entered a position. And now, the market does precisely what you had expected it to do and moves in your direction. Great! However, you didn’t place a Take Profit order or the pair didn’t just reach it. It’s close, but it didn’t reach it yet.
So, do you “let your winner run” and not settle for a partial profit? Greed tells you to do so, and fear tells you to close your trade. A compromise could be moving the Stop Loss order to the break even point, or to some profit. Too many traders tend to do nothing – let the positions float and hope the price will reach their Take Profit or continue moving in their direction forever.
This may end in a market reversal and a losing trade.
Taking advantage of others’ greed
As aforementioned, many winning trades aren’t materialized, and they continue to float. When these open trades are accumulated in a certain direction, these trades will eventually have to closed. When this happens, the market moves in the opposite direction.
Information about positioning is available through the weekly Commitment of Traders (COT) report published by the CFTC. This is published on Friday with data from Tuesday of the same week. So, this data is relevant for traders who use higher time frames.
Recently, positioning against the euro reached extreme level. Too many traders expected the euro to continue losing and losing for a long time. When euro shorts reached an extreme, the euro began reversing the trend, gaining against the US dollar and also against other currencies such as the Australian dollar.
Traders who were aware of this extreme greed could have profited from these flows.
What do you think? How do you treat greed?
Further reading: 5 Most Predictable Currency Pairs – Q3 2012Get the 5 most predictable currency pairs