a. You must accept the fact that losing is a constant part of trading.
b. Successful trading, like successful living, is determined by how well we manage our losses, not by how well we avoid them.
c. The key to losing well is to keep your losses small!
d. Everyone experiences loss one way or another.
• HOW TO ELIMINATE THE SIN OF FAILING TO CUT LOSSES SHORT
Never place a trade without first determining where you will bail ship if things go wrong. At what point will we be convinced that we are in a failed trade? PLAN YOUR TRADE; TRADE YOUR PLAN!
Always adhere to your predetermined stop loss. ALWAYS!!
If you are having a tough time adhering to your stop loss (shame on you), then start off by getting into the habit of selling half of your position. NEVER DOUBLE DOWN!!
2. Dollar Counting.
a. Dollar counting is a sin usually committed by traders who are not used to winning very often.
b. Don’t let the money (which isn’t even yours) burn a hole in your pocket.
c. This is associated with fear…a very strong emotion…and what are we supposed to do with emotions???
• HOW TO ELIMINATE THE SIN OF DOLLAR COUNTING
For each trade, establish two potential exit prices, at which you will sell your entire position. One exit price is your stop loss and the other is your initial estimated profit.
Sell only if the stock you are in violates one of the two exit prices. Whichever one occurs first…it doesn’t matter.
If the urge to exit before either sell point is met becomes overbearing, satisfy the urge by selling only half and letting the remaining half sit until the strategy says to exit. Never ever allow yourself to double down!!
3. Switching Time Frames.
a. There are four dominant time frames a trader works in:
i. Micro term (intra-day trading)
ii. Short term (swing trading)
iii. Intermediate term (position trading)
iv. Long term (investing)
b. Do not buy in one time frame and sell in another.
c. If you switch time frames you are in essence telling yourself that your strategy is worthless and that you have no confidence in yourself.
• HOW TO ELIMINATE THE SIN OF SWITCHING TIME FRAMES
If you enter a trade in one time frame, make sure to construct your exit points in the same time frame.
Do not adjust your stop loss downward when in a long position (or upward when you are in a short position).
4. Needing to Know More.
a. We already have enough things to figure out and decide on before we enter a trade. Don’t add to this list by demanding to know more!
b. Fear of pulling the trigger is usually the result of wanting to know more.
c. The market is anticipatory and big gains tend to occur ahead of the facts. If you need to know more you’ll miss out on a lot of profit.
• HOW TO ELIMINATE THE NEED TO KNOW MORE
Be very reluctant to buy immediately on the heels of good news. Remember, professionals are in the habit of buying the rumor and selling the news.
Use charts to form your buy decisions and sell decisions. Remember…charts are the footprints of money and they never lie!!
If you find yourself hesitating because you’d like to know more, stop and ask yourself, “Is what I’m looking for necessary for the trade, or am I just looking for more comfort?”
5. Becoming Too Complacent.
a. Your greatest failures will come on the heels of your greatest successes.
b. A lengthy and profitable run is a reason to step back and enjoy your winnings…even a professional poker player breaks from the table to count his chips from time to time.
c. The market always corrects itself.
• HOW TO ELIMINATE THE SIN OF BECOMING TOO COMPLACENT
Reduce your lot size by half. If you typically trade in 1000 share lots then drop it to 500. Start playing with other people’s money!!
Reduce the frequency of your trades. If you are hot then you are hot, but keep in mind that you are trading with a set strategy. Don’t change it just because you are winning!
6. Winning the Wrong Way.
a. Does the end justify the means? Many traders do not realize that it is totally possible to make money in the market the wrong way.
b. What happens if you make money on a trade that your stop loss was intentionally ignored on?
c. Can an idiot make money in a bull market? Can you make money in the market by shear luck?
d. You must be aware that making money incorrectly reinforces bad habits and irresponsible actions.
e. Once traders get the taste of success that comes the wrong way, they are almost compelled to repeat that wrong until it robs them and takes back what was incorrectly earned…and sometimes it can take much more!!
• HOW TO ELIMINATE THE SIN OF WINNING THE WRONG WAY
After every winning trade, review each component of the trade: the entry, the initial stop placement, the waiting, the money management, the exit, etc…this comes through your use of your trading journal.
Recognize that the two evil H’s, hoping and holding, will be the major culprits that most frequently lead to winning the wrong way.
Don’t get emotionally tied to your trades. Stick to your plan.
Plan your trade and trade your plan.
7. Rationalizing.
a. If you place an order and it immediately goes against you, but doesn’t stop you out of the trade, don’t rationalize your entry by thinking that the trade is now worthless. Stick to your plan!
b. Don’t adjust your stop losses down on a losing trade. It doesn’t make any sense.
c. The sin of rationalizing usually falls into three deadly mistakes:
i. Switching time frames.
ii. Planning the trade and failing to trade the plan.
iii. Rationalizing to yourself to psychologically ease the pain.
d. Rationalizing is usually the number one tool “the devil” uses to persuade people to do things they normally wouldn’t.
• HOW TO ELIMINATE THE SIN OF RATIONALIZING
Exit the position.
The trader must realize that he is rationalizing. How can you know if you are rationalizing? Three things:
Asking “why”?
Checking for news.
Thinking in terms of “maybe”.
*Traders must always keep in mind that there are two types of mistakes or losses. One type is due to the law of averages and are therefore unavoidable. Even in Las Vegas the house sometimes looses, but they don’t freak out about it. The second are those that are the result of the seven deadly sins and/or faulty execution of the trading plan. Our challenge is not to avoid loss, but to manage it well. This is tougher than you think.
“The Disciplined Trader” and “Trading in the Zone” by Mark Douglas