The Seven Deadly Sins of Trading

By: DailyForex.com

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!

Rob Tovell made his first trade at the age of 15 - 5 ounces of silver! From that moment a life long love affair with the markets was born. Until recently, Rob held his series 3 designation and was registered with the National Futures Association in the United States as a CTA (Commodity Trading Advisor). Today he designs trading systems and tool for traders - you can learn more from Rob at RobTovell.com.