Trading is a wonderful business. No inventories to worry about, no
employees, nobody to answer to, you can set your own hours; the list of
benefits goes on and on.
However, as in any other business venture, you must know what you are
doing if you are to have any chance of success. Trading, as in any
business venture, is fraught with danger. Bad trading habits
can wipe out those that do not take the proper precautions very
quickly. Success comes from hard work, dedication, and long hours of
practice and study.
As traders, for us to have a shot at consistent profitability, we
must be disciplined and adhere to a strict course of action, remain
focused, and avoid the...
7 Deadly Sins of Trading
Sin #1) Trading without a plan.
Most traders attempt to trade without a plan. They hear something, a
rumor perhaps, or they think some big market moving event is about to
happen and they ‘just know’ which way it will move. Well, I suppose that
is fine if you have a plan, a reasonable course of action. But alas,
most traders seldom do.
Most commonly, traders find themselves with fabulous paper profits
but then watch it all evaporate and turn into a nasty loss! That would
never have happened if they had a plan.
If you want to be a trader, you need to create a trade plan for yourself. Your plan should cover:
a) A method of how and where you are going to enter the market.
b) How much risk to take on each trade?
c) What percentage of account equity to risk per trade?
d) What to do when a trades goes wrong. Where do you exit?
e) What to do when a trade goes right. Where do you exit?
f) How long to give a trade to start working before pulling the plug on it.
g) What are my odds/probabilities of a successful trade? A losing trade?
Sin #2) Averaging Down a Loss
If laddering into a multi-contract position is not in your trade
plan, then don’t even think adding to a losing position! When you are
dealing with the type of leverage available in Forex and futures
trading, this ‘sin’ could be, and has been the financial ruin of many
traders! Take the loss and move on.
Sin #3) Over Exposure
The third sin of trading is tied directly to our personalities as
traders. We traders tend to be ‘A’ type personalities. We have a
tendency to get a little cocky as our wins pile up, and to think we're
immune to the sins of trading. We get a little too over confident for
our own good and this can adversely affect the risk parameters of our
trade plans. Never increase your trade size as a percentage of account
size. Once you increase your percentages, your profits will increase
exponentially, but so too do the losses. Just don’t do it! I’ll save the
‘Math of Trading’ for another article.
Sin #4) Over Playing Your Hand
I’ve been found guilty of this trading sin many times as I’m sure most other traders have also.
You are in a nice winning position and price reaches your target and
you wait to see if it will keep moving in your favor - Greed has kicked
in!.
It keeps going through your target, you’re feeling warm, fuzzy and
smart and then, without warning, it’s moving hard against you. What a
shame! Your target was reached, you had nice profits, but failed to
honor it and take the money. Now you have nothing (or worse). You turned
a winner into a loser – don't let greed take the wheel.
Sin #5) Leaving The Money
There is nothing wrong with allowing your account to grow. But you
also need to remove a percentage of your profits on a regular basis as
compensation for your hard work. You also want to be at the point where
you are playing with ‘the house's money’ as soon as you can. Think of
your original stake as a loan. You want to get that loan paid off just
as quickly as possible so that all further withdrawals are all yours!
Let’s not even mention that from that point on, your original risk
capital is now safe and sound, you are now financially ahead, trading
with winnings. Ah, what a feeling!
Sin #6) Lack of Patience
A tough principle for most people, let alone traders. Lack of
patience. The patience to be able to sit, wait, and watch for your
signal or set up before initiating a trade is an absolute prerequisite!
If you just start ‘punching in’ anywhere because you think the market is
going to go up, or you think it’s going to tank, you have just crossed
that dangerously thin line between a disciplined trader and a
self-destructive gambler. We all know how that scenario will play out
over time.
Sin #7) Switching Your Strategy During Game Time
This I think is the worst possible ‘sin’ a trader can commit. When
the market is open and you are watching every tick, the combination of
adrenaline and emotion can really impair
and affect your judgement. Apart from having a trade plan and following
it, plan your trades and strategy while the market is closed. That is
the time when you can plan rationally and apply sound judgement to your
analysis. During the trading session, unless there is a very obvious
change in the marketplace, don’t alter your game plan. Doing so is
usually the result of an emotional, impulsive reaction to some minor
event and you’ll end up undoing all your rational planning. Make your
plan and stick with it!
May the ‘Gods of Odds’ shine favorably upon you – and may the sins of trading be permanently banished from your life!
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