You might have heard of the seven deadly sins, the seven human weaknesses that can lead to a path straight to hell. It is said that if you have committed sins, then you have to pay for your sins. This applies to the trading world as well. If you give into bad behaviours and commit sins, then you will lead to poor trading outcomes.Nevertheless, if you can avoid these seven deadly sins of trading, then you guarantee yourself a better chance of becoming a successful trader.
To be a better trader, you must recognize these “Trading sins” and learn how to overcome them. In this post, we will discuss all seven sins and how traders can avoid seven sins and become a better trader.
1) The first deadly sin is Wrath. It is an uncontrolled feeling of anger or rage. In trading, traders tend to believe that the position they take should always be profitable. They get angry about a losing trade and try to avenge their loss either by holding their loosing position too long or by taking an inappropriate decision like averaging. The best course of action is to quickly identify problems, accept the loss and move on.
2) The second deadly sin is Greed. Greed is a strong desire and pursuit of material possessions. This human emotion leads to an obsession of wanting more and more.Traders often fall prey to this emotion. Under the influence of greed, they start thinking that if they take a profit by selling their position, then they might miss out on further gains. They start changing their target price expecting the stock to go higher and higher and eventually investments plummets right in front of their eyes.
This effect of greed has a very old and depressing history of turning unrealized gains into realized losses.To avoid this sin, you need to create a trading plan and follow it. You should remember that once you have set a price target, then you must stick to it and exit the position as per your plan. Don’t let emotion like greed overpower you and blur your decision-making ability.
3) The third deadly sin is Sloth. It can be defined as an absence of interest or absence of effort. Sloth is a sin of abdicating responsibilities.
It is quite amazing that traders often pay little attention in doing research before entering the trade. Not paying proper attention to trades lead to poor performance. Traders should not follow tips blindly they should conduct proper research before entering into any trading position.
4) The fourth deadly sin is Pride. Pride is irrational belief that one is essentially better than others.
When it comes to trading, many a time’s traders fall prey to their pride. When markets are moving in the favourable direction, it seems as if all trading position a trader is taking is working. Hence, he starts thinking that he is a smart trader.
When things are turning in your favour then you should not be prideful – pride leads to irrational decision making and increases risk taking ability. This, in turn, can lead you to take a large position which can wipe out all your profit and capital when the tide turns.
Hence, you should not be prideful when things are going your way, and you should stick to your trading framework and trading plan and follow it without emotional interference.
5) The fifth deadly sin is Lust. It is an intense or unrepressed craving to pleasing oneself. This strong desire leads to unhealthy actions to fulfill one’s desires without any consideration of consequences.
In trading, it is often seen traders emotionally get involved with stock. The classic example of lust in trading is putting too much into a single position. Although large concentrated bets can give a huge return, the converse is also true that one mistake can erode your trading account. Traders have fallen for companies and lost all their money invested in one stock, companies like Enron, Worldcom, Satyam, Global Crossing; etc. all had huge, fabulous runs and disastrous endings. To avoid this sin, you should believe on numbers and charts and diversify your portfolio, by spreading out your investments to decrease your risk
6) The sixth deadly sin is Envy. It is an ill feeling towards possessions of someone else. Traders often compare their returns against their fellow traders. In the process sometimes they start being envious of someone else’s trading portfolio
Envying corrupts our thought process. One starts taking irrational decision like chasing stocks that other are chasing or creating bigger position than they normally would not have created.
You should avoid this comparison and stop envying other’s portfolio or returns. Instead, do what works for you and be happy with your trading strategy. Everything else is secondary, making decisions under the influence of emotion like envy can have a disastrous effect on you.
7) The last of seven deadly sins is Gluttony. It is characterised by the overindulgence and overconsumption of anything.
Too much indulgence in trading or overtrading is a big problem among traders. Overtrading can damage your account more quickly than almost anything else you can do. Just like overeating a gourmet meal we don’t realise overtrading when we’re doing it.
You can keep away from overtrading by putting a proper trading plan in place. A proper trading plan will tell you about your entries and exits. A proper trading plan will also tell you when you’ve traded enough, and it’s time to stop. A simple trading plan can be created by putting a trade quota per day or month, in other words, you need to put a limit on the number of trades you are going to take!
The seven deadly sins are deadly not only in real life but also in trading. They are the source from which other sins flow. Frequently making excuses for sin leads to a hardened sense of right and wrong, which in turn can destroy your ability to make a right decision and ultimately your wealth.
Learning about the sins we commit while trading can help us raise our awareness about ourselves and can help us in becoming a better trader.
So next time when you trade just be aware and stay away from committing a sin.