Listen to the Podcast
Subscribe to the podcastiTunes Stitcher
Hey, this is Sasha Evdakov and welcome to another episode of let’s talk stocks, episode number 96, and in this episode what I’d like to do is discuss greed. Greed is a major factor when it comes to trading, and it’s one of the things that does a lot of things for us.
Some people think of greed as a bad thing in society as we look upon greed, we tend to look at it as if someone is greedy, that it’s a bad thing, but it can actually be used to benefit you in many ways, so that’s the core and the focus of this week’s discussion, greed.
Before we get there, I do want to briefly touch on the markets, if we take a look at the market right now, you can see that we’re down about 3-2 points on the S&P, which if we get a little pullback, you might see the market coming into this support level and retesting things.
If you take a look at the daily, you can see we hung around this higher price level for pretty much a couple of weeks, and then we roll back over, pull back a little bit to retest those levels, and now we’re bouncing at those levels, so we’re kind of playing right there in those small consolidations patterns, so we’ll see. We’ll see if the market comes back and pulls back into those all-time highs that we made about a year or so ago.
And if it does that and it bounces, then you could say, we’re a little more bullish, of course, you want to see volume coming in for confirmation, as that would be more positive.
If you don’t see the volume, and if it accelerates to the downside with higher volume, then chances are it will break through and then were it stops will depend on how much selling pressure comes in. You have some other support lines, somewhere right around here at the 2100 – 2150 level. You could also get into the 2050 level on the S&P and then, of course, some minor supports at around 2025 at the swing lows here. And of course even right here at 1875 area, so where it stops when the selling pressure hits, selling typically is a lot stronger than buying.
You can see that when we look at buying pressure here, stocks try to continue to move higher for a few weeks and they try to go higher, and it took two weeks for it to attempt to move higher, about 18 trading days here.
All of those were whipped out within one single day, so selling pressure can accelerate things and move the markets.
Those are some things to keep an eye out, as far as other stocks, which you are watching for, between Netflix you still have a few of the same patterns that we were watching before the same with apple. It might be trying to break out of this pattern right there.
Facebook, if we take a look at that, it’s still kind of isolating, even though it broke out right there, you can see it come back because hat break out was a little too high, too fast, so a little pullback, profit taking is going to happen and if you’re looking for a value buy, somewhere around this 122 level might be an excellent price, if you can get it at 120 it could be an excellent value price, so long as that it holds there.
Getting into the more core of the lesson today, I’d like to talk a little more about greed, it’s one of those things that people tend to avoid, and I’ve spoken about desire in the past in one of the hidden episodes, in fact if you want to go to it it’s called monkey and apple episode, it’s listed on the website, it’s not on YouTube, because it is hidden.
But if you’ve been with me for some time, you might have heard of some of the concepts I mentioned before.
Greed and motivation
When looking at greed, one of the things that I find is that many people, especially in society, in the regular modern world, they look at greed as a bad thing, as a negative thing, we have certain things that are positive, certain things that are negative.
Some things in the real world are indeed not proper. They’re not correct. They shouldn’t be there. They are harmful in the way that they’re just bad to be around.
But other things we think of them as negative, such as greed, we think of them as negative, but in reality, they’re not that bad, so when I look at greed, it can be used as a motivator.
When you’re looking at greed, it can be used as a motivator to achieve personal gain and personal wealth, so for example, if you’re looking to get into a trade, and let’s talk about Home Depot for example.
When we look at home depot, if you’re looking to be greedy on home depot, and you’re motivated, and the stock breaks out, let’s say at this point at the $90 price tag, and now you’re greedy, now that stock continues to climb higher and higher allowing you to make more profits, it will enable you to capitalize more in the market.
Greed is not always a bad thing
If you’re playing a sport, let’s say you’re playing basketball or football or tennis or hokey, if you’re greedy, you’re actually more driven to achieve something because you want it, because the core of greed is looking upon yourself, it’ a little bit more of a selfish thing or a desire that you crave for something, something for your gain or personal self. And that’s not necessarily always a bad thing.
For example, if you crave something healthy like you’re constantly greedy for salads rather than hamburgers that can lead to very positive results. If you’re constantly greedy to contribute to other people, then again, that can lead to very positive results.
But again, you’re doing it on the one hand for yourself because you are greedy because I want to do this and whatever the thing that you want to do can lead to very positive results in society, in the world or for your achievement.
When we look at a sports analogy, and you’re greedy to achieve and win a tournament, that can lead to great results, you might win that tournament, which can lead to you being drafted into a professional sports team, and then making more money, and then with that, because now you have exposure, and you have popularity, it might allow you to visit other nations and countries and be a motivational speaker, or help out and boost the morale of those countries and things like that. So there’s a lot of positive that can come from that.
The downside of greed
The downside with greed is, of course, we have excessive greed that also gets tied into a very emotional context or material context. The downside is really when you link greed to directly just yourself, where the benefit is only yourself and no other person is benefiting from it.
If I’m trying it especially to things like material possessions and I’m greedy for things like a brand new computer screen, which only I would use and my family would not get a chance to use. Or a brand new cellphone, where nobody else can touch my phone. All these material possessions, or a brand new car that I don’t let anybody else drive or touch or anything like that.
Those are the moments where you have excessive greed, and you have greed to the point where it’s unhealthy.
When we look at two lines right here, and one is extreme greed, and one is just average, it’s ok to be a little bit greedy at times because now you’ll get that personal gain to evolve your life and then eventually you can contribute to other people, because that’s how you get personal gain, whether that’s in sports, whether that’s in monetary figure, in investing, it allows us to drive a little further.
Greed is based on emotions
And you’ll bounce around, sometimes you’ll contribute a lot more, so you’ll be on this end, where you contribute a bit more, and other times you’ll be more in the middle, and there’s going to be parts in your life where you’re going to be greedy and other parts when you’ll be entirely not greedy, you’ll be completely generous, and that allows you to live a better lifestyle and all of these really are based on emotions.
Whether you’re generous right here at these low points, or extremely greedy at the highs points, it’s just part of life and just like when you have an emotion, and you have happiness as an emotion, you can’t constantly be in a state of happiness, it just no way that that’s going to happen. You’ll whipsaw here back and forth.
Greed and decisions
But the downside with being extremely greedy in the markets is that when you’re incredibly greedy, you’re going to get very unclear decisions, and when you’re in a very high peak emotion no matter what state you’re in, whether extremely happy, extremely sad, any time you have an emotion you have irrational thinking.
And that’s where the problems lie within the stock market, is when we’re incredibly greedy because we’re attaching things to our self, we’re looking for monetary gain, and it’s all about us.
One of the things that I always like to say to compensate for this is that you should still take profits into strength and if you can eliminate a little more greed from your trading, you’ll be a lot more successful because you’ll be content or happier with the earnings that you make.
Build things up slowly and be patient
For many people, they are always looking for more and more in the stock market, especially when you’re starting. When you’re first starting in sports, you might want to play with people about your same level. You’re not going to get a lot of knowledge and insight playing with the professional tennis players right away.
It might be great, and it might be fun, but if you’re 8 years old, you just first time put a racket in your hand, playing with a professional tennis player is not going to be that beneficial, instead you need to build things up and be patient to learn ball control and to learn how things work around your stroke, about your swing and just get that muscle memory, and the same thing when you’re just getting started in the stock market, you can’t be that greedy looking to trade with the professional and get 10-15% return in a month right away.
Be happy with what you get
Be patient, calm down, be less greedy, be satisfied with getting just $5, with $15, be satisfied with just being positive and not losing money in the market. Because if you’re playing sports and you’re right away brand new, chances are you’re losing to other people, but in the market, we all expect that just because we’re in the market, we’re a genius.
If you can calm your greed down a little bit, it’ll bring that success a little bit further into a higher percentage of success. And your earnings will increase, because the times that are always the toughest is when things are going really well, and all of a sudden that stock starts to pull back in a big way or even, like in home depot here, right around that January, February time, when these stocks pulled back in a big way, you were greedy and you were making killer money
And now all of a sudden you see your account whipped out 10% - 15% It’s because you were greedy, you held on to things too long, too far, elements were overextended, or you didn’t take any profits.
Always take profits into strength
Some of the things regarding greed is still to take profits into strength, learn to do that, whether that’s half, whether that’s a quarter, whether that’s a third, whatever you’re comfortable with, take some profits into strength.
If we look at some other charts, you can see where this could have caused some trouble. So for example, let’s say you got into this stock, here we have Dunkin Donuts, and you got into the stock in 2014, stock goes higher, higher for multiple weeks and then if you didn’t take any profits, then within that first couple of months in 2014, you had a pullback and you’d be in losing territory.
The same thing would’ve happened right around mid-2015, broke out at approximately $50, continue power higher about $55, it’s a $5 gain, and then it pulls back all within a few months down to $39 - $40, so again, greed could play a significant role in that. But if you would’ve sold half and then got out and break even on the next half of the shares, you would’ve at least took some profits on those positions and those trades.
Chimpanzees and apples
One of the exciting things that I like to do is often study animal behavior and psychology and the story that I shared in one of the previous episodes in the past, probably about a couple of years ago is when we have a chimpanzees, when we evaluate chimpanzees, there’s a little study that was done that if you give a chimpanzee an apple, they’re pleased, they’re extremely happy with receiving that apple, because it’s something that they really crave, they love apples, they want to eat the apples.
If you do another study with another chimpanzee, and you give him two apples or let’s just say you take that same chimpanzee in another week you give him two apples, but then you take away one apple within a few minutes or a few moments later, all of a sudden that chimpanzee goes crazy, it goes exceptionally wild and the reason for that is because of the loss that it incurred, because of what it had in the past.
So if you have a loss, even though that you’re much better off than you were before, so, for example, the chimpanzee had no apples whatsoever, and then all of a sudden it rained that same one apple.
Although the difference here was that if you start with two apples and you take one away, the fact of seeing that second apple or having the possession of both of those apples causes you to be a lot more emotional, at least for the chimpanzee, and humans are not much different.
Most people are like chimpanzees
For many of you traders, if you take a look at your trading environment and you start trading different stocks and let’s take a look here at CarMax as we look at a trend line here or support line or resistance line here at around the $54 level in late 2014, the stock broke out.
So here you’re profitable in these stocks and companies, and this stock let’s say breaks out from $55 all the way to $67, so let’s say you made $7000 on the trade, whatever the number was depending on the number of shares traded.
But now over the next few months or weeks, this stock starts pulling back, so if you were in positive territory, $7000, but now your account drops to $4000, you’re still $4000 profitable, but many people due to greed, they get nervous, they get worried, they think irrationally and they go crazy, just like the chimpanzee.
Because you had that number that you saw at the $68 price tag, you were at $7000 in profit, and now you’re only profitable $4000, you incurred a $3000 loss at least that’s what it feels like. And because of that feeling, this is where irrational behavior takes place.
And it’s one of the things that hurt many traders because you start getting emotional, you start thinking about what if it continues to go down. You start thinking unclearly. You stop thinking about your plan, and you start wondering if things will change if they are broken, and that’s really what can cause a lot of trouble.
Create an automatic strategy
If you don’t have a system, if you don’t have a plan in place to make trades, specific to that system or strategy, that’s really what’s going to drive you nuts and insane in the market.
Some of the best advice I can give you regarding the emotions of fear or trading systems is probably to number one, create a system or strategy that’s a little bit more systematic, or automatic.
For example, one of the ones that I like to use is, if you’re looking at a daily chart or graph and we look at just a simple moving average, so let’s take the 20 days and I’ll do Hasbro in this example.
This is a simple strategy or system. The minute the stock breaks in a clean line and closes above the moving average of the 20 days, you buy the stock. The minute it breaks below it and closes below it, you sell the stock.
If we take a look here, January 6th, 2016, I would buy the stock it closed above it on the second bar, even though it’s a down bar, it closed above the moving average. It went up a few days, and here on this bar, also thought it broke the moving average a little bit, it still stayed above it at the closing price. So again we continue riding, riding, riding and then right here on February 10th, 2016 it closes below it. So that’s when I would get out of the stock.
Get emotions out the door
That’s a simple system and strategy, and there are no emotions attached to it, there’s no greed, there’s no fear. Of course, I would probably be cheering my stock, and saying “stay above it,” but once that happens, you’re out, that’s it. And then again, you wait for your next opportunity, so it closed above it, let’s say, February 22, 2016, and then still, we continue running, and it closed below it right around March 24. So you’re in the trade for a few weeks, and that’s it, that’s a simple strategy and simple system, and it gets the emotions out the door.
That’s one of the first things that I would say, pretty important advice to combating the greed factor when it comes to trading. Because otherwise you’re going to hold on to things as they continue to go down, and when you have those moments, especially, let’s say an example here, as we look at Hasbro, even though it broke above it here. If you hold on to things, you can see that some things can go way below those moving averages.
And if you look at many other charts and if you use the moving average as your system, and here for example, here is NAVI, which I don’t know what this company is, but you can see here it broke above the moving average in February 2015 and you can see I got in it, but then once it broke below it, if I was greedy, I would’ve probably held on to that stock and say, it will come back, then I’m thinking, well it’s a great company, well they make awesome phones, well you know, they’re doing this, or they’re doing that, or the CEO is this, or the CEO is that.
And you start rationalizing with yourself, and this is part of the greed factor, and you can see what happened to this stock. It was at $20, and now it’s below that $10 mark.
It continues to run down, and now it popped and it got into $14 but you’re still way under that $20 range where you bought it, and now you’re just hoping and praying and waiting another year or two or three or four for it to get back to even.
Find a system or strategy that works for you
That’s the thing. The first thing is to create a policy or a strategy that works for you. There’s a lot of system and strategies, the moving average is just one that I like to use because it’s simple to understand, maybe later when we get into webinar series and things like that I’ll get into more complex systems and strategies or do an add-on bonus here to the systems Couse.
The second thing would be to peal profits into strength, so when things are moving in your favor, let’s say, again, using the same chart, NAVI, when things are moving in your favor, be content or happy, especially if you’re new to trading. Be satisfied or happy with a small gain, and little may depend different from one person or another.
Small to you might be $50, it might be $20, it might be $100, and it might be $1000 it might be $10000, small to you will depend on your account size, the trading size that you’re doing, but be happy with a lower gain, because if you can do that, you’re going to eliminate that greed in your trading. And that’s going to save you in a big, big way.
Because once that stock climbs, let’s say you have 4-5 days of green, how likely is it for a stock to constantly be 5, 6, 7 days of green or 5, 6, 7 weeks of green days? So you take some profits, what’s real, what’s not real?
Is it realistic to see green days every single day? No, it’s not. Be real in your evaluations, and if you have 4-5 weeks of gains, you take some off. And now when it comes back, at least you have some profits from those remaining shares.
That’s one thing that you really want to pay close attention to, is that you’re constantly taking profits into strength, because if you’re not then when it comes back, and you’re coming back into the same price level, you’re just going to break even constantly, but this business is about… taking money off the table.
As the stock runs in your favor, take 10% off, or 5% or 30% or 50%, if you’re new, I would recommend half off and then half when you break even, or just a little above your breakeven point. To stay safe.
If you’re a little more experienced and you understand the price action and the behavior, then you can let things run a little bit. But otherwise, if you hold on to things and you don’t sell into strength, you’re going to be little greedy. And that greed is going to play in and become a problem later when things don’t go your way.
And that’s typically where the problems lie when things don’t go your way. It’s not when things are beautiful that’s a problem. When things are running fine, everything is great, when your car is running fine on the road, you have no questions. But if you’re, let’s say your water pump breaks, or you’re leaking coolant, and you have a small problem like leaking coolant, and you know that you have that problem, but you’re able to carry additional coolant in the back, then you can refill it every so often.
The same thing with oil, if you’re leaking oil, as long as there’s not a more significant problem down there, as long as you have oil in the back and you know what the problem is, or what could be the problem, then you can constantly keep refilling it.
Reduce the risk
And with stocks, what’s going to be your problem? The problem is going to be if it moves against you. When can that happen? It can happen at any time. So what do you do? You constantly keep putting that oil in or putting that water in. So you keep taking money off the table, that’s how you reduce your risk, that’s how you stay profitable, because you’re taking your money off the table, and with driving a car, with low on oil, how do you reduce the risk? You keep putting more oil. And with the market, how do you reduce your risk? You keep taking money off the table.
Always look at those kinds of factors. And a lot of times, if you can trade systematically, remove the greed and sell into strength, that will help in a big, big way.
Remember the chimpanzee example. If you started with one apple, you’re really happy, because you didn’t have an apple before. If you start with two apples and you get one taken away, you’re actually in a very angry, upset and pissed off mood.
Instead look at it, be happy with what you have, because you’re much better than where you were in the past. So sticking into a more positive light, thinking about things in a little bit more positive than where you were, looking back at things. It will help you be a bit sane in trading and ultimately help you look at really the risk factor within trading because that’s finally what it comes down to. Looking at the risk, what’s possible and reducing that risk as things go in your favor because it’s all about risk and money management.
So if you can do that and you can do it systematically, looking at price action, looking at volume, looking at how stocks move, putting it all together, that’s really when you get an excellent, winning situation.
I didn’t get into complete detail about greed or fear and mixing them, because there’s maybe some other things I’d like to cover in a psychology curse for this, and some of the things we include in trader transformation, regarding the fear and greed.
But I hope it really touched some key elements for you. Especially if you have a tendency to sell a little too soon, buy a little too late, all these things are just emotions that are playing with you, and by having a little greed, it’s ok because that’s really what gets you into the market. It gives you that short drive of emotions, and if you have too much greed, it could lead to disaster.
Having a little balance is really where you want to stay at. But ultimately looking at things to control that and manage that, having a system, having a process in place that you can do time and time again, that’s really where you can trade consistently.
If you’re trading based on emotions, based on, “I want this stock, I want to make this much money,” it’s going to be difficult for you to be consistent in the market thinking along those lines.