In their book, Tools and Tactics For the Master Day Trader, Oliver Velez and Greg Capra, outline the 7 deadly sins of stock trading. Are you guilty of commiting any of the following?
1. Failing to Cut Losses Short: The most frequently committed error among traders. “We are of the school of thought that believes that traders’ most precious commodity is their original capital, and that they are doomed to utter failure if they do not do everything in their power to prevent its erosion” (91).
2. Dollar Counting: Focusing on how much a trade is up or down at any given moment can rob traders of profitable opportunities. “Once a trade is taken, traders must work to forget their profits…and focus on the proper technique” (94).
3. Switching Time Frames: This is the error of buying in one time frame and selling in another. The trader may buy in a longer term time frame, say the daily, but see a reversal on a 60 minute chart and sell. This is “nothing more than a rationalization to ignore stops” (96).
4. Needing To Know More: Everyday traders must face the fear of pulling the trigger. One of the symptoms of this fear is the need to know more but “the fact of the matter is that the brass ring goes to those who can act intelligently without the need to know more” (98).
5. Becoming Too Complacent: It is easy to become complacent when there has been a string of winners. “When a winning streak has fattened your purse, you must do everything in your power to keep your hard-earned gains and maintain the same intelligent mind-set that helped to produce those gains” (100).
6. Winning the Wrong Way: Many novice traders make money the wrong way and will eventually pay for it. Traders make money the wrong way by not adhering to a rule or a stop loss and end up making money anyway. This sets up a “taste of false success, and the market will eventually ensure that they give back this unearned profit sooner or later” (103). The next time a rule or a stop is ignored the losses will far outweigh the previous gains.
7. Rationalizing: This is a form of denial when in a losing trade. Honesty, real honesty, no matter how ugly the truth, will put you above most market players unable to summon such strength from within, preferring instead to be comfortable, blaming their losses on something or someone other than themselves” (106).
No matter which one of the seven deadly sins we have committed, we should ask ourselves the question: have we learned from them, asked for forgiveness, and are we ready to turn over a new leaf? The market is a great teacher if we will only listen and obey.