The 7 sins of trading

31 March 2015
Juan Colón

If you’ve made it to Darwinex, this post is no news. Then again, it pains us to lose newbie traders to mistakes that lost thousands before them. Foretold is forewarned, so here we go.

Religion paved the way listing the 7 sins that undo man.

7 Sins

No claim to deity status, but here’s our list on the 7 sins that undo independent trader.

1. Greed

Trading is a lot of things, but it’s not a get rich quick scheme. Winning consistently takes out-smarting ¨the market¨ (aka highly experienced and motivated others).

Do you really think you’ll beat them 1 month into your trading career?

So here we go: if trading is just about making money to you, quit now. You’ll never put in the hours unless you actively enjoy. Without the hours, sooner or later you’ll lose.

Plus, life is too short to waste on what you don’t really love. Really.

2. Business model

Starting out with 3.000 USD, it’s easier to make 1 million USD by playing the lottery, than by trading for 3 years.

You CAN trade yourself into 1 million USD, but the ONLY way to get there from 3 K is to attract investor capital. Wonder why? Here’s some cool math on trader evolution. And no, regulation, lack of sales skills or other hurdles are no excuse. Darwinex for one takes care of everything other than your trading.

Actually, most of the remaining, more commonly known sins are but a symptom of 1 & 2, but 7 sins makes for more compelling SEO than 2 🙂

3. Excess risk

Do the math. Tough to turn 3000 USD into 1 Million without tons of leverage. Even if you don’t do the math the forums full of 30% a month winners will tell you.

When markets behave “predictably”,  leverage feels comfortable… until it doesn’t.

And please, please, please, don’t think the Super Duper EA and the Michelangelo Teenage Turtle Trading Strategy will succeed where leverage failed. It won’t.

4. Loss aversion

You know the adage: bad traders hang on to losers and cut their winners short.

Trade live cash with enough risk (enough = scary enough to make you nervous) and your lizard brain will trigger loss aversion:

  1. When losing: you’ll hang in hoping that it reverses because stopping losses out IS painful. Of course things can ALWAYS get worse.
  2. When winning: you’ll be ecstatic, but wary that the market could “steal” your profits. So, you’ll close out and lock them in. Snag is, some winners continue your way and you miss out on nice(r) profits.

A monkey trades no better than random: neither wins nor loses consistently.

Loss averse rational monkeys fare worse: cutting winners short and hanging on to losers GUARANTEES losses.

5. Bad risk management

Please note that 3 (Excess Risk) is a related, but ultimately different sin.

After a good trade, you feel ecstatic … practically perfect. Greed kicks in and you want to win, quicker. You double up. And it works, and on it goes until…

After a bad trade, you feel humbled. You realise how much risk you were taking, and gear leverage down. And so on.

Here’s the snag: changing risk across trades de-couples profits from strategy quality, as follows:

  1. It could be that your strategy is crap but you got lucky (randomly) leveraging winners more than losers. You mistakenly think your strategy is fantastic, and pay a bundle to understand what fooled by randomness means.
  2. The reverse also holds: bad risk management makes a surprising amount of traders lose money on winning strategies, and quit trading for the worst possible reason.

Trading is a numbers game. To win some, you have to lose some. Within reason, losses are part of the bigger win, as long as you always risk the same on every trade.

6. Mental weakness

Let’s face it. Trading is tough. And it’s lonely. If you spend time on trading forums looking for other people’s winning secrets, think again.

If you were winning, would you spend time around forums? Same thing goes for trading signals, selling EAs, copy-trading, etc.

Sorry. It’s tough but if you think it through, you’ll realise it’s true. You’re on your own, time

7. Broker Bashing

Some brokers’ incentives are better aligned than others, but it’s you who chooses your broker, so whatever happens after that is also your choice.

Even if stuff happens over which you have no control, there are predictable mistakes. Which customer group would you like to belong to:

  1. Customers of FCA regulated Alpari: anyone who traded GBP 50.000 or less with FCA regulated Alpari UK will get their monies back.
  2. Customers of paradise island registered brokers who went bust and kept their monies

Trading with an FCA regulated broker does not guarantee return ON capital, but it does guarantee return OF capital – if you’re going to make a mistake, do it on the other 6 items, but not this one. Plus, as you can see for yourself, Darwinex is FCA safe and we’re NOT expensive.

What’s next?

If you didn’t know any of the above, hope it helps!

Most likely you did, but here’s a thought. In a world where independent trader = gambling loser, stigma will give you a harder time raising investor capital.

The carnage of independent traders is also bad for you. Perhaps you could kindly share this next time you find a misguided soul in a forum?

If you disagree, what’s your take on trader sins?