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7 Deadly Trading Sins, and How to Atone


Trading tips to help you beat greed, pride, and five other common investing pitfalls.

In other words, investors who commit this sin are violating the old axiom, "Don't put all of your eggs in one basket." It may seem trite, but diversity is crucial to trading success.

Penance: Diversification should happen in two dimensions. Rather than loading up on one favored stock or sector, (1) spread your investing capital across a variety of sectors; and (2) carefully seek out a mix of both bullish and bearish trading opportunities. By following this advice, investors will be poised to profit regardless of overall market conditions, and trading capital won't be completely decimated by one wrong guess. Options are an ideal way to add diversity to a portfolio. A combination of puts and calls offers exposure to market swings both bearish and bullish, and options on exchange-traded funds (ETFs), in particular, are a user-friendly way to spread your investing dollars around.


There are actually several different ways laziness can undermine your investing success. In particular, though, we're talking about the kind of slothful investor who's trotting out the same analytical tools and strategies he used back in the 1980s. In a rapidly changing market environment dominated by hedge funds, high-frequency trading systems, dark pools, and algorithms, traders have a responsibility to keep up with the times and adjust their approach accordingly -- or risk rapidly diminishing returns.

Essentially, traders have to "adapt or die," according to Schaeffer's Senior Technical Strategist Ryan Detrick. "I've been trading for over a decade and things have changed so much," explains Detrick. "If you had an 'edge' a few years ago, there's an above-average chance it doesn't work anymore."

And if you're guilty of this offense, don't let inflexibility compound the problem. "As traders, we always need to be on the lookout for ways to improve," explains Detrick. "And the No. 1 way to do this is to be aware of tactics that just aren't working for you anymore. Don't keep trying to make them work."

Penance: To counteract the gravitational pull of sloth, you must make a concerted effort to broaden your horizons. If you always consult the Wall Street Journal for your investing news, mix things up by reading Bloomberg Businessweek for a change. And as traders increasingly flock to social media sites like Twitter, tap into the hive mind to find new trade ideas, indicators, and points of view. As long as the market keeps changing, remember -- you're never done learning.


Anthropologists have not yet been able to pinpoint a specific date, but at some point in recent history, it became acceptable for analysts and pundits to describe stocks and sectors as "sexy" or "not sexy." The shorthand typically refers to the differences between, say, a high-growth tech stock and a dowdy old Dow component peddling toothpaste (with apologies to Procter & Gamble). As a general rule, traders are overwhelmingly attracted to the potential for big, breakneck rallies and outsized growth, whereas long-term stability and steady dividends ostensibly inspire Street-wide snoozing.

But when you're putting your hard-earned dollars on the line, the last thing you should do is chase after that shiny new distraction of an Internet IPO that's drumming up Beatles-level hysteria (with apologies to Facebook). As the great contrarian Humphrey B. Neill said, "The crowd is right during the trends but wrong at both ends." Nobody wants to be the last guy on the bandwagon -- but that's exactly where you'll wind up if you blindly invest in the latest, hottest, "sexiest" stock the talking heads on TV are all touting.

Penance: For starters, you may want to read Neill's classic book, The Art of Contrary Thinking. Then, begin to apply the principles of thoughtful contrarianism to your investing (which means you're cautiously skeptical of the consensus opinion -- not knee-jerk contrary). For example, if you notice media coverage toward a specific stock or sector swinging dramatically toward one end of the sentiment spectrum, ask yourself: Is this bullish (or bearish) attitude justified by the stock's technical and fundamental performance? If the answer is "no," you've taken the first step toward identifying a potential contrarian trading opportunity.


It's perfectly natural to get angry or upset when a trade moves against you or doesn't play out as expected. However, wrath becomes a fatal flaw if you allow it to influence your next move. When a strategy goes awry, one of the worst money-management mistakes you can make is to double down on your next trade in order to "avenge" that loss with a big winner.

To be blunt, that's because losing streaks are not only possible, they are inevitable. A perfectly successful trader might have a "batting average" of .350, which means he's striking out on a full 65% of his positions. Given those odds, and a sufficiently lengthy timeline, it's simply unavoidable that investors will encounter strings of two or more losing trades in a row with some regularity.
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