In year 600 Pope Gregory compiled a list of seven deadly sins, which included pride, greed, envy, wrath, gluttony, sloth, and lust. Based on these I have come up with a list of cardinal sins of a trader, which would be characterized as pride, greed, envy, anger, lack of moderation, laziness, and doubt. As you can see, the trader’s sins are pretty much the same as those compiled by the Pope.
Some of the richest people on earth have one trait in common, they are humble.
Warren Buffet, for example, has pledged that he will donate 99% of his staggering $47b fortune to charity, he still lives in his $30k house he bought 50 years ago, doesn’t have a yacht as he believes it is a “toy”, has $100 in his wallet and two ordinary cards.
I heard about this trader, he went on a spree of profitable trades, something like 96% of trades in green, making homerun after homerun. Then pride kicked in. He started telling friends that he is the best trader in the world, that nobody can match him, later jokingly telling his friends to worship him as their guru. That is when the tables suddenly turned, he started hitting one loss after another. Soon he gave back all the profits he made and was back to square one.
Humbleness in trading is very important. If you make a series of homerun trades don’t let it get to your head. Always tell yourself that the market is unpredictable and be ready for a negative outcome on the trade. Do not concentrate on how much you can win, but rather on how much you can lose. From time to time I hear people saying that this strategy is so good, that it will surely work. This is pride. No strategy is invincible, if it works today it might stop working tomorrow.
You should always say to yourself that you are not smarter than the market, because once you believe that you are the market will eat you alive.
Greed can be basically defined as the desire to want more. In some cases “positive” greed can be good. This is when greed becomes a motivation to achieve a specific goal i.e. make money to buy a house. But greed can be destructive when it entices one to make money just for the sake of making money. “I trade forex because I want to be a billionaire (trillionaire)” or “because I want to be richer than that guy”. There is no real purpose in this greed and it is the downfall of many traders.
Overleveraging a trade in forex can easily be attributable to greed. “Why should I leverage 1:5 when I can go 1:100 and make 20 times more?”. Brokers know this all too well, and some even offer leverage 1:2000! Overleveraging is the demise of many traders, so you should beware of it.
“That guy on myfxbook has a bigger bankroll than me? Gotta catch up with him.” This is how envy places its seeds in you. “It’s not possible that this guy got better returns than me, I will show him”. Successful traders who have no other traders to envy start envying the Forbes rich list, they want to be on that list.
Once envy kicks in you will want to make more money in a shorter time-span, and this is when you will start taking riskier trades, and risk can take you both ways, either you will win a lot or lose a lot.
Ever had those moments when a stop loss hits? Then you reenter as you are sure of your strategy and it hits again? Then it hits again and the price reverses in a violent and volatile manner? Anger sets in. You feel like breaking something (I heard of monitors being smashed). Other instances when anger could set in would be when your entry or take profit was missed by half a pip and price reversed quickly.
This is when you become emotional and continuing trading at this point would not be rational. It would be better for you to go out and do something not related to forex i.e. go for a walk, to a cinema or restaurant. Once you have calmed down it would be OK to go back to the charts, but personally I believe that taking the day off would be the best thing to do.
Lack of moderation
Lack of moderation in forex basically comes down to overtrading. “The market is ranging, not moving much, so, since I’m devoting my time and energy to it, then I will squeeze out every pip possible, going long, short, swing trading.” This is a recipe for disaster.
Your trades should be carefully planned beforehand. You should know why you are entering the trade and why the stop loss and take profit are placed where they are. Once you become “trigger happy” and start making many trades the chances of failure are much greater.
Laziness could be a consequence of pride. “I am so good that I know better than the rest, and the price will go my way anyway, so I will not wake up at 7:30 to see how things are unfolding, but sleep till 10:00.” “I will go meet my friends instead of listening to Yellen, after all I know better than the rest and don’t have to listen to her.” Once a trader acquires a lot of knowledge about the markets, he/she might have the inclination to become lazy i.e. spend much less time on analysis than before.
This could also lead to the demise of a trader. You should always spend the same amount of time on analysis as before, because this is the only way to “master” the markets. “No pain, no gain” as the saying goes. If you want to achieve success in anything you do, you must put work into it.
Newbies in forex are drawn into the market by ads like “Tired of working 9-5? Here you can double your money in one day and do a tenfold in one month”. But these ads never say that 95% of traders fail in forex. London Citi has a term for it: 90-90-90, meaning 90% of new traders lose 90% of money in 90 days.
Once the account is blown doubt sets in whether this is the path that one should take. The answer is yes, you must work hard and do the things that the profitable 5% are doing so as to join their club. You must have faith in what you do.
The seven cardinal sins of a trader are the foundation for other faults that a trader might encounter in his/her trading career. Keeping them in mind and trying to avoid them, and at the same time trying to carry out the seven virtues (opposite of the sins) will not only make you a more successful trader, but a more fulfilled human being.