Recently I've been thinking a lot about the emotions of fear and greed and how they impact our behavior and our profitability as traders. We've all probably heard the saying that "Wall Street is driven by two things: fear and greed" and while emotions do play their part in the big picture they can certainly impact individual traders as well.
This has been on my mind lately because I've been working with a couple of traders that are trying to push their profitability to new heights and a part of that is selectively increasing their profit targets on some trades. However, they've yet to find a good balance of greed that gives them the best long-term result.
That's right, I did say balance, so I'm not saying greed is bad. Then again, it's not really that good either. You could say that the dose makes the poison.
What I mean by this is that in my experience and those I've worked with (both professionals and students) I've found that a bit of greed is generally a good thing for identifying and achieving high value targets and enhancing overall profitability but only as long as the strength of our greed doesn't become so overwhelming that it clouds our judgement.
As the old trading maxim goes, "pigs get slaughtered".
Going for the big profit because you've got an excellent price pattern break or a very high momentum swing does bring a bit of greed into the trading equation but that's not a problem if the evidence is there to support it. If that evidence fades or a new trading picture develops that weakens our trade then it's vital that we adapt accordingly. We need to take the profit! The problem with all of this is that if our greed becomes too overwhelming then it can make it difficult to see these changes as they are happening, we fail to adapt, and a big drop in overall profit can be the result.
Building Emotional Discipline
When working with novice traders using our STA Day Trading System I always start them out with a fairly strict rule-based approach to setups, entries, stops, and profit targets. The reason this is important is to minimize the impact of emotions on a new trader's performance while building their skills and pattern recognition. Being very strict about targets isn't about profit maximization - it's about learning to execute and manage trades calmly with consistent results.
Having this structure builds emotional recognition and discipline too. For many new traders there is a tendency to panic if a trade doesn't head into profit immediately and to take a small win or loss but once you've managed dozens of trades and seen how often they reach good levels of profit then it becomes much easier to be disciplined in your future trading since you innately understand how sticking with the plan affects your bottom line.
However, once a trader gets plenty of screen time and their skills become more proficient there are some major advantages to being a bit more adaptable and sometimes aiming for larger profits on trades. This can be considered more of an intermediate stage of trader development where some week to week profit consistency has already been achieved but now a trader is looking at ways to maximize that profitability and bring their overall results to an elite level.
Don't Let a Good Profit Go to Waste
So this brings us back to those student traders I mentioned earlier. They are entering this stage and at first it can be a little bit overwhelming. Greed can get the best of us and we see every trade as a potential "home run" which will make us loads of profit and it becomes difficult to see any other possible outcome once we've taken a position. This can lead to good potential profits becoming losses after price fails to move to our initial target or sometimes to emotional decisions where a trader panics and exits for break-even before price inevitably moves in their direction.
It's important to realize here is that the market doesn't really care what our plan was or how strongly we felt about price hitting a specific target. Ultimately price is king and that's why it's so important to trade what you see, not what you think. So the best course of action is going to be to plan your trade, then trade your plan, and be ready to adapt your targets if the market doesn't confirm them through price movement.
The approach that has always led to the best long term profitability for me has been to "let the market decide". When I try to impose my will on the market and force it to conform to my expectations, it rarely seems to listen!
If I'm aiming for a big 5 point run instead of a normal 2 point profit then the market better pull me there without too much fuss. If price hesitates after a couple attempts to make a move, if the market seems unsure of its next move, then I'll gladly just take my profit and bank it. Sure, price might still move on and I miss out on a bit of the move but you can't understate the importance of having that profit safely tucked away instead of it just being a potential profit that isn't yet realized. There's no reason to be afraid of taking profits!
I think this particular day and the corresponding charts are a good example of the kind of profit-taking this article is all about. There were plenty of times where I aimed for a bit more than my usual 2 point target as the market has had plenty of big swings lately. Sometimes price carried me to those bigger profits in a clean and direct way and sometimes price stalled so I adapted and took the good profit that was still available.
Some days this approach can mean huge profits as most targets are hit, some days it might mean you miss out on a bit of the moves (as I did in a couple cases here), but ultimately taking solid profits when available generally leads to not only increased profitability overall but also more confidence in your trading performance throughout the day as well.
Don't underestimate the confidence boost that taking profits can provide!
It's important to note that this doesn't mean I just take a tick or two of profit any time it's available. Nope, if I'm taking the risk then I deserve something decent as a reward so even if I don't get my 4 to 5 points (16 to 20 ticks) I'm still going to try and take a couple points if I can. If a student I'm working with is jumping in and out of the market taking small losses and wins then they're not going to get anywhere so they have to make sure they're still getting paid a good profit for their time in the market and for taking on the initial risk.
Being adaptable isn't about panicking when price stalls and taking the little scraps of profit the market leaves behind. It's about giving the market a good chance to make its move and if the momentum just isn't there to carry you then bank your profits and wait for the next quality setup to arrive.
An adaptable trader isn't looking for emotional reasons to exit the market and allowing their fear or greed to dictate their trading process. They just follow their plan, objectively assess the market as new price data comes in, and take their profits when the evidence no longer ato be in their favor.
Profit is banked, confidence remains high, there's no frustration in seeing a great profit disappear, and from there you just look for the next good trade to come your way. Rinse and repeat.