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This is the most common problem with traders, especially the new entrants. No, actually the problem is widespread. Even experienced traders find it hard to control greed and fear while trading.
I remember one person who is my client told me once that he made 2 crore profit from almost the same investment and then lost approx. 3.5 crore and is now left with 50 lakhs.
So what destroyed his wealth? Greed not Fear.
What is an example of fear destroying wealth in stock markets?
It is more prevalent among mutual fund investors. When stock markets tumble they either stop their SIP or just withdraw all money in fear from their mutual fund investment.
Similarly, a trader in fear takes out a small profit when he could have made more just by waiting a few hours and when it comes to losses; they let the losses run in hope for a reversal. They do not cut short their losses in fear that if they do, they will lose money.
Ultimately expiry comes and they end up losing four times the profit made in last trade.
With a proper plan you can control greed and fear, but do you plan before a trade? Or still, speculate?
Here is one email that I received a few days back which is asking the same thing – how to control greed and fear.
How to Control Greed & Fear?
1. Never over trade. If you have 5 lakh in your trading account any trade you take must be with a stop loss of 1% of the entire capital in your account. Which means even if you trade with 1 lakh out of that 5 lakh, you must ensure that the max loss that you can take is 5000. Make sure you do not take more than 1% loss of your entire capital. This way if you win even 50% of the times – you will stay in the game for long.
2. If you lose you lose, do not get into revenge trading to get back the money lost.
3. 10% per month is simply not possible for long time. If you over trade you may lose 10% a month but not make 10% a month.
4. Fear taking naked trades. Means never take any un-hedged position in either options or futures. If you hedge your trade then the fear of losing too much money will automatically goes as hedging ensures you lose less. All the strategies in my course include hedging.
5. If you made huge money in one trade do not risk all that money in the next – you will lose all. So even if you are a good trader and doing good most of the times – keep 1% stop loss rule intact for your entire account across different segments and for your entire trading career.
If you follow the above rules you can overcome greed and fear.
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