“Greed, for lack of a better word, is good. Greed is right. Greed works.” — Gordon Gecko
Remember Gordon Gecko from Wall Street? That slick-haired emblem of late-80s Wall Street capitalism? No? Well, here’s a spoiler. Gecko was actually a sociopath whose selfishness in matters of money would probably have scandalized Adam Smith, the guy who more or less invented the concept that self-interest is good for the economy. So, no, that kind of greed is never good. But if you’re a trader, greed can still be good, just for different reasons.
The simplest way to understand this is to imagine you follow trends and you set out to catch a move with a trend-following strategy.
Let’s say you enter your short position when the 10-day moving average crosses below the 20-day moving average, and you’re set to exit when the 10-day moving average crosses back above the 20-day moving average.
In this case, you definitely don’t want to pull out when the market starts moving your way. You want to hang in there. Riding the trend, in this case, is in your self-interest because waiting for the trend to play out—and pay off—is part of your strategy. Hence: greed is good.
The good news is, if you’re algotrading, you won’t ever have to worry about sticking to the parameters of your trading plan. Your pre-programmed algos will do that for you.
In fact, if you look at this way, the pressure of having to decide whether to ride a trade out or not—and all the stress, fear and second-guessing that go with it—will disappear from the equation too.
So, yes, greed can be good, when you have a plan. But can it ever burn you?
Bulls make money, and bears make money, but pigs get slaughtered.” — Wall street adage
If you learn nothing else from this post, it’s that life on Wall Street is no holiday. While we wouldn’t ever suggest you trade places with the slaughtered pigs of Wall Street, or pull a Gordon Gecko, we also wouldn’t want you pulling a “Maverick”. (Yes, today is 80s film day!)
Remember Maverick from Top Gun? Always flying full-throttle into trouble without a plan?
Don’t be that kind of trader.
This is what we mean. The market is moving your way. It’s going so well that you’ve actually surpassed the take profit level you set in your strategy and you decide that you’re going to say goodnight to your trading plan and fly wherever you want like Maverick.
Ok, obviously, this story has a number of possible endings. But there’s always a very good chance that you’re going to end up like Goose, Maverick’s dead flying buddy.
You could become so stuck on your position that even when it reverses and your gains turn into losses, you keep riding it out. Your plan says the opposite, but so what?
Naturally, this pisses you off and you decide to hold on even longer—until the market finally sees your point and starts moving your way.
The fact is, you can’t really stay angry long. You’re hemorrhaging money. You go from angry to scared faster than Tom Cruise on a Kawasaki Ninja. Then you freeze up, even as you speed way past your initial stop loss level and into serious losses.
For manual traders, this is a daily reality. Fortunately, for you, loyal algotrader that you are, you don’t need to worry about chasing after unrealistic targets because your algos will keep you honest. Your stop loss level is set and running in the background even while you’re off doing stuff you love, like catching up on your 80s movies.
And when you hit your pre-programmed profit take, your algo will close the trade for you.
Is there anything better than that?