How to overcome the 7 deadly trading sins

November 29, 2015 17:13

Dear Traders,

Tremendous amounts of money can be made in Forex financial trading. In the decade I have been trading on the Forex market, I have enjoyed financial success but also made every possible mistake at least three times. The most common of these mistakes are what I call the 7 deadly sins of trading Forex. Today I want to pass on my learning from these mistakes, so you don't have to make them. So this is not a blog about how to make money - rather one about how to avoid losing it.

No trading plan

I have intentionally put this at the first place on my list of deadly trading sins. I have had hundreds of email or webinar communication with both experienced and inexperienced traders and it never fails to amaze me that year after year, trade after trade - their approach is the still the same. A trader who thinks a market is about to start rallying will usually say something like, "I think EURUSD is going up to 1.1200; where do you think I should buy it?" My response is usually, "well, where are you going to get out if you are wrong?" Often there is silence, or perhaps their next question is "well, if it doesn't go up, what are you going to do then?" More than 95% of the traders I have come in contact with, have no any trading plan. That means they do not know what to do if they are wrong and they do not know what to do if they are right.

Fear and greed

At certain times in your trading career these emotions can make you completely and absolutely irrational - oblivious to what is really happening. Fear is an extremely powerful emotion, but also an essential survival response.

It can make you rely on hope; hope that the market will do what you want it to do because it must! Not surprisingly, that doesn't matter to the markets. Markets will still do whatever they want, no matter what your fear. A good friend of fear is greed. Greed is the excessive desire for money and it is an irrational expectation to make a quick profit from a trade. It often manifests as looking at your open profit on a trade and thinking about how much you've made and about how much more you 'could' make by keeping the trade open.

Overconfidence

Contrary to newbie traders, I personally know a lot of experienced traders who are overconfident. It has happened to me many times before. It causes people to overestimate their knowledge, underestimate risks and exaggerate their ability to control events. Being an overconfident trader will make you overtrade and make revenge trades, which is also one of the deadly trading sins.

Revenge trading

Revenge trading usually occurs when after losing a trade, you immediately enter another trade. Most of the time your second trade (revenge trade) is not a valid trade based on your method, but rather an emotional/impulse trade. This happens because you have lost money on your first trade and want to take a revenge on the market by getting your money back as quickly as possible. Usually what happens is that your second trade is bad and either it goes against you or you close it prematurely as you are afraid of losing more.

Chasing the market

Let me ask you something. How many times have you entered a trade after the trend had already been established? Entering longs at the tops or hitting the sell button when the market is bottoming? Well if you have answered yes to either of these questions, then that means you have chased the market. That is a very dangerous practice as it is just a matter of time before those trades make a negative impact on your account. The market is like a shadow, if you try to catch the shadow you will never succeed. But, if you let the shadow come to you, then you will embrace it.

Overleveraging/improper money management

I am constantly amazed at the huge number of Forex traders who have no concept of money management. I have heard of many stories about traders making 20% per month consistently and yet making a mockery of traders who "only" make 2-5 % per month.

Money management is controlling your risk through the use of stops, while balancing your potential for loss against your potential for profit. Until you realize that money management is crucial for long-term success, you will experience only lucky periods while being overall negative over the longer term (1 - 5 years).

Below you'll see my 3 year-old account which shows how proper money management can keep you consistently growing your account. Approximately 60% return-on-investment in 3 years equals 2% per month, provided that I trade 10 months per year. A big dip on my account happened because I forgot to put a protective stop in one of my pending orders.

Booking small profits and letting your losses run

A very common mistake among Forex traders is taking small profits and letting losses run. After one or two losing trades, they are very likely to take a small profit on the next trade - even though that trade could have turned into a large profit-maker. After entering a market, you don't know where to get out. Once you start losing money your tendency is to let your loss get larger and larger as you hope that the market will retrace to let you break even… But of course it doesn't happen and you are sucked into a Spiral of Doom. I have also made a webinar about the Spiral of Doom that I advise you to watch, as it can help you avoid the negative effects associated with losing trades. It can also help you become more confident and a better trader.

The remedy

First and foremost, make a trading plan that covers all the key elements. The process needs to cover:

  1. the trading strategy
  2. trading journal
  3. written guidelines for what you will do and and look for in the markets
  4. clearly defined risk.

In truth - I couldn't have learnt from my mistakes if I hadn't known what I was doing wrong. Reviewing all of my trades has helped me identify the problem areas. Markets constantly change and it's especially important to review your trades when these changes occur. In the previous blog we talked about good habits. That being said, you should always include images of your ideal setups, so that you are constantly reminded of what it looks like. At some stage your "ideal" setup will become imprinted in your brain to the point of knowing exactly what you are looking for in the market each time you opt for a trade.

Although we mentioned 7 deadly sins of Trading, there are also other major mistakes traders repeat constantly and we will mention them soon in our webinars. Which major mistake do you think is missing in the list? Feel free to let us know in the comments below.

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