The Seven Deadly Sins of Trading

Just in time for Halloween, here are the Seven Deadly Sins of Trading. It's some scary stuff, let me tell you. I may not be the world's greatest trader, but I am definitely an expert on this particular subject. I've made all of these mistakes myself at least once, some more than once, and I'm still working on one or two. Hopefully, someone else can learn from my sad experience. So without further ado, here they are:

1. Impatience

I put this first because impatience has cost me more money than the rest of them put together. I can't count the number of times where I've unloaded a stock because it wasn't performing and the next day it took off. Or bought too early - that's the classic "catching the falling knife". And the most irritating case is when I'm trying to get in on something and the price just keeps hovering right above my limit order. Every time I finally get tired of waiting and bump up my limit to meet the ask, two minutes later the price drops down to my original price - or lower. Patience above all else.

Oddly enough, the opposite of impatience, timidity, can be almost as bad. I've had lots of stocks just take off and run away from me while I was debating pulling the trigger. There's nothing like the feeling of being left standing in the dust as you watch the tail lights of the bus pulling away from you. That's one reason I like swing trading - this isn't as much of an issue there.

2. Sloth

This is also one of the "classical" seven deadly sins. Trading is hard work. Just because you're not swinging a pick axe or twisting wrenches doesn't mean it's not work. Forget all those stupid ads for automatic systems where all you have to do is hit buy or sell when some blinky thing lights up. You have to stay current with the news, both financial and general, and watch the charts. Every day.

3. Avarice

Another classical sin, aka greed. Now it's well known that greed and its companion opposite, fear, are what make the market go round, but that's no reason for you to join in. You don't have to trade without emotion like some sort of financial Mr. Spock, but fear and greed will kill you eventually. Fear is what leads you to leave profits on the table or worse yet, get out at the bottom. Greed is what keeps you from getting out at the top so you end up watching all your profits evaporate. Buy low, sell high. Fear and greed are what make you do it the other way around. Try to replace fear with respect and greed with gratitude. You need to respect the power of the market and be grateful when it hands you money.

4. Undercapitalization

I don't think the importance of this is sufficiently appreciated. I think way too many people decide they're going to trade for a living and start off with tiny account, like $5000, figuring they'll parlay that sum into riches of Bill Gatesean proportions. Ain't gonna happen. Too little capital means you are limited in how much heat you can take, and unless you enter every single trade exactly at the bottom and then it goes straight up, you're going to have to suffer through some unrealized losses at some point. Insufficient capital leads you to take excessive risks to generate returns you might think are reasonable (but are usually just a dream). The net result is that your account blows up and you're done.

So how much capital do you need to start trading? Well the SEC says you need a minimum of $25,000 just to get in the game if you want to day trade. But that becomes your floor so you really need at least 10% more in order to have room to maneuver. Even if you don't want to day trade, I'd say $25K is the bare minimum, and that number won't make you a living.

I started my first account with the laughable sum of $2000 (back in the days before the pattern day trading rule) because I was afraid if I had more I'd lose it (see avarice and fear above). But that wasn't enough money to be successful, so naturally I blew it all up. I think it took about four months. As Jim Cramer always likes to say, "you've got to stay in the game".

5. Ignorance

When I first started trading, I knew nothing, and I got my head handed to me. The problem was that I'd read a few books, did a bit of paper trading, and thought I had it all figured out. Bzzzt! After 10 years, I'm willing to admit that I now at least know what I don't know. But I'm far from an expert. Trading is a performance art, like skiing or playing the piano. To get good at it, you have to constantly practice, study, and learn all you can (see "sloth" above). This was a recurring theme in Dr. Brett Steenbarger's late, lamented TraderFeed blog right here on Blogspot. I highly recommend reading that over.

You also need to keep meticulous records. You absolutely need to keep a trading diary and a performance spreadsheet. Track everything. If you don't know what you're doing, you can't tell how well you're doing.

If you don't have the time or inclination for this, forget about trading. You're going up against armies of people who are smarter, stronger, and richer than you'll ever be. You don't show up to a gun fight with a knife. Don't trade until you are properly armed with a solid plan and all the time and capital you need to execute it.

6. Hubris

Oh my, another one of the classics. The sin of pride. If something doesn't go your way, just take your lumps and move on. The market is excellent at sniffing out know-it-alls and teaching them lessons. Don't let your errors get you mad (see TWM below). Revenge trading is about the worst thing you can do, and it is guaranteed you'll get your head handed to you.

7. Distraction

TWD - trading while distracted. And the results can be as deadly to your account as texting behind the wheel of your car can be to your life. You can't trade if there are kids screaming in the background, dogs barking, phones ringing, etc. You really have to concentrate. I have occasionally hit Buy when I meant Sell, or sold the wrong number of shares. This is the sort of behavior that ends with keyboards smashed on the table top and monitors thrown out the window. One time I even hit sell on the wrong row and accidentally sold one of my cherished holdings. Oddly enough, that stock tanked shortly afterwards proving once again that it's better to be lucky than good.

Also, obviously don't commit TWI (trading while intoxicated), the other TWI (trading wile ill - if you have the flu, take a sick day), TWM (trading while mad - at your spouse, at the market, or at life in general), or TWS (trading while stupid - see "ignorance" above).

Well there you have it - the seven awful, scary things you should never ever do when trading. Avoid these errors and you'll be a lot better off. I know. Happy trading!