The Seven Deadly Sins of Trading

07/27/2010 12:01 am EST

Focus: STRATEGIES

John Forman

Senior Forex Analyst, Thomson Reuters IFR Markets

The idea of the seven deadly sins of trading was tossed my way last week. After giving it a bit of thought, I came up with what I think is a pretty good group. The list below is the seven that came to mind as the ones most likely to do real damage to a trader.

1) Thinking That Trading Is a Path to Quick, Easy Money

One of the questions that’s part of the list answered in my book, New Trader FAQs, is “How much money can I make trading?” because it’s one that comes up frequently and it reflects the mindset of many coming into the markets.

It’s said that 90% or more of new traders fail. I don’t know if that’s the actual number, but it certainly is a high figure. A big part of the reason for that is having unreasonable expectations coming in. Trading is promoted to many as an easy way to make lots of money, either indirectly through stories of great success, or directly, like in the case of overt forex marketing. While trading success can eventually be reached, it tends to take a lot of hard work and a fair amount of time to reach that point. Those who think they’ll be able to jump right in and have the profits rolling into their account from the start get slapped in the face with reality pretty quickly, and for many, it is the end of their trading, whether they’ve lost a lot of money or not. Successful trading is a long-term thing, and many folks just are not prepared for that.

2) Not Effectively Using Demo Trading

I will be the first to tell you to get into real-money trading as quickly as possible, but taking the time to do proper demo trading is important. There are two purposes to demo trading. The first is to familiarize yourself with the platform you’re using, and if you’re a real newbie, to get familiar with the basics of prices, P and L, and all that. The second is to work through the trading strategy development process to know that you have a workable methodology you can employ to good effect. Of course, demo trading is not the same as live trading, as just about any experienced trader will tell you. If, however, you cannot profit in the demo environment, you don’t have a lot of hope for profitable live trading.

3) Failing to Pay Attention to Detail

Making simple, stupid mistakes will cost you money. Yes, sometimes you mess up an order entry and it works to your advantage. Most of the time, though, when you make a mistake, it hurts. I’m talking about totally avoidable mistakes here, like forgetting to put in a stop, or putting in the wrong price for an order, or buying rather than selling. It’s basic attention to detail. There’s really no excuse.

4) Not Thinking Through Your Approach to the Market

A lot of folks jump right into the market with both feet without taking any time to think through what they’re doing. This is something that hit home with me when my book, The Essentials of Trading, came out. I wrote it for folks just getting into the markets, but found I was hearing also from many who’d been in the market for a while and found they needed to go back and revisit the foundational elements of their trading because they’d been all over the place in their development. They’d bypassed that aspect of things when they got started. By that, I mean they didn’t think enough about things like trading time frame, markets, and personal elements which feed into that what, why, and how they trade.

5) Getting Fixated on Your Winning Percentage

New and developing traders spend way too much time thinking about the frequency at which they have profitable trades. It’s a simple question of whether it’s more important to you to be right or to make money. For some folks, the being right (or at least not being wrong) thing is important to them. They probably shouldn’t be traders because trading is about making money. You can have 90% winning trades and lose money, just as you could have 10% winning trades and see your account balance growing nicely.

6) Thinking More About Rewards Than Risks

We trade to achieve positive results; to grow our account balance. As such, it’s quite easy to fall into the trap of thinking more about all the pips we can make rather than all the pips we could lose on a given trade. A good trader thinks about both at least equally, and if you listen to some of the elites in the business, they indicate a clear focus more on the potential negatives. If you’re thinking to yourself “I prefer to be optimistic,” then you’re being naïve. Trading first and foremost is about making sure you don’t expose yourself to the chance of getting taken out of the game because of big losses. After all, you cannot make gains if you can no longer trade. Traders with an “optimistic” mindset have a tendency to take on too much risk.

7) Getting Too Excited

Whether you are having a good run of success or coming off a bad performance, if you’re chomping at the bit to get into that next trade, you need to take a few deep breaths. This sort of excited state can lead to very bad decision making. I’m talking things like taking trades that don’t meet your system’s criteria, trading too big, or trading more markets than is good for you. Some folks can get away with trading while agitated. Most, of us, though, don’t readily notice how our emotional state feeds into our trading choices. Brett Steenbarger has written some good stuff on the subject.

Now, I’m sure others will have their own thoughts on the seven deadly sins of forex trading. So what about you? What’s on your list?

By John Forman of TheEssentialsOfTrading.com

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