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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.

So, if you're placing extra capital into successive trades in the hopes of "getting back" at the market for your losers, you're simply setting yourself up for a costlier kind of failure. If you insist on upping the stakes with every new opportunity, a very average losing streak could eventually decimate your trading account. And when that happens, you won't even be able to stay in the game -- let alone make up for lost profits.

Penance: Traders with a short (or nonexistent) fuse should be scrupulous in their money management, particularly as it applies to allocation. When you already have a system in place to control how much money you're committing to each trade, it's easier to stay disciplined (and suppress the urge for vigilante trading justice). The concept of fixed fractional position sizing dictates that each trade receives a predetermined percentage of your trading capital -- for example, 10%. This allows you to increase the size of your bets as you collect winners, while putting proportionally fewer dollars at risk when the momentum is moving against you. Conversely, in a system where you commit the same fixed dollar amount to each position, you lose the ability to maximize winning streaks and control losing streaks.


Let's subtitle this sin "Keeping Up with the Buffetts." There's a persistent obsession in tracking the moves of celebrity investors and hedge-fund managers, with articles and websites promising to give all of us Average Joes the inside tips we need to start trading like Warren Buffett... with the implication being that you, too, can magically transform into a benevolent billionaire with a homegrown fortune built on Dairy Queen Blizzards and Coca-Cola Classic.

Here's the rub, though: If it were that easy to be Warren Buffett, we'd all be Warren Buffett already. The man's trading decisions have been a matter of public record, via SEC filings, for decades. If it were a simple matter of aping his buy and sell orders after the fact, the U.S. would be overrun by wealthy investors begging for tax hikes.

And as the Oracle of Omaha himself would tell you, it's taken a combination of careful analysis and years' worth of patience to build up his fortune -- and even at that, Buffett's as vulnerable as the rest of us to plain old luck, for better or worse.

So, aspiring to learn from his experiences? That's fine. Thinking you can replicate his success with a $10,000 trading account and the same set of public records available to everyone else on Wall Street? That's a setup for disappointment.

Penance: Slavish devotion to the Gospel of Warren is its own unique brand of idol worship, and plenty of otherwise-pious traders are guilty of this offense. The key to curing your crippling case of envy is to clarify your own investing goals. Are you a conservative investor with an eye toward dividend payments, or an aggressive day trader looking to cash in on triple-digit gainers? Are you trying to supplement your current income, pad your kid's college account, or hit the jackpot with a few big winners and retire early? If it helps, write out the answers to these questions as an investing mission statement. Your ultimate goal(s) -- and no one else's -- should determine what kinds of trades you make, when you make them, and how you manage them.


Pride comes before a fall, and ego leads to many a costly trading decision. Obviously, playing the market requires a certain level of confidence in one's analytical skills, but there's often a very fine line between confidence and arrogance. The former trait is what allows you to ride out the short-term bumps in the road with an eye toward long-term success. The latter quality causes traders to cling to their losers in the stubborn belief that it's everyone else who's wrong.

"Don't think for a second you are smarter than the market, because you aren't," cautions Detrick. "The market doesn't care what you think and price action is all that matters. I am constantly questioning my own opinions and fully aware that I'm wrong a good deal of the time -- just like everyone else."

And our top technical strategist knows whereof he speaks. "I had a lot of success trading until 2008, and then struggled mightily as the market rolled over. Looking back, I was stubborn and didn't accept the fact that market could go lower," confesses Detrick. "It was an eye-opening and painful experience, but one that made me a better trader, I believe. It taught me to be open to anything and accept that I could be wrong."

Penance: When a trade (or the entire market) is moving against you, don't bury your head and dig in your heels. Instead, take a step back and reconsider the rationale behind the trade. And do so with a cold, calculating eye to avoid the pitfall of confirmation bias, where you're simply digging up data points to support your preexisting opinion. It's entirely possible you've missed a crucial fundamental catalyst that throws your entire analysis off the rails. Or perhaps there's been a shift in the direction of the broader market or sector, and your trade is getting taken along for the ride. In any case, it's important to determine whether you've hit a minor rough patch, or if it's time to cut that loser short altogether. Keep an open mind, and never stop questioning your assumptions.

This article by Elizabeth Harrow was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
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