Seven Deadly Sins of Trading doc

Seven Deadly Sins of Trading
by Harvey Walsh
Copyright 2012 Beige Media
Published by Beige Media at Smashwords
Smashwords Edition, License Notes
This ebook is licensed for your personal enjoyment only. This ebook may be not
be resold or repackaged, but may be given away to other people provided it is not
modified in any way.
Contents
Introduction
Sin Number One: Switching Strategies
Sin Number Two: Not Having a Trading Plan
Sin_Number_Three_Not_Understanding_Money
Sin Number Four: Not Testing
Sin Number Five: Not Putting In The Necessary Effort
Sin Number Six: Overcomplicating It
Sin Number Seven: Not Taking Action
More From The Author
Introduction
Between the private coaching I used to run, my original Day Trading Freedom course,
and my best-selling book How To Day Trade Stocks For Profit along with my more
recent forex book, I have taught traders from all over the world. Whilst many of my
students have never traded before, there are many more who come to me having some
experience, but who for one reason or another are not profitable in their trading.
What is it that makes one person profitable while another person of similar
background, intelligence, and motivation, is unable to make money from the markets?
It's a question that I have spent a lot of time thinking about. By working with a great
many unprofitable traders (as well as plenty of profitable ones) I have discovered the
same basic errors cropping up time and again. In fact, so common were these
mistakes, I started referring to them as the seven deadly sins of trading. In this
ebooklet, I tackle each of those mistakes in turn, and I tell you how you can overcome

them.
Sin Number One: Switching Strategies
"The Hunt For The Holy Grail"
The holy grail of trading - we've all looked for it - the super system that never loses.
We've searched forums, read books, been to seminars, and discussed in chat rooms,
but the secret system that wins every time continues to elude us.
Why do we waste so much time and effort searching for something that doesn't -
cannot even - exist? Because it's far easier than facing up to the reality that trading
isn't quite as simple as buying when a magic indicator says buy, selling when it says
sell, and watching the endless profits roll in.
Actually, it is almost a simple as that, but we'll come to that later on. For the moment,
the important thing to recognise is that there is no holy-grail-always-wins trading
system. Anyone who tells you otherwise is stringing you along. It's certainly easy to
get caught up in hype and marketing talk about winning systems. It is in our nature to
look for shortcuts, for the easy way out. Of course the reality is that if there was a
trading system that won every time, everybody would start using it and the markets
would become unbalanced and inefficient, which in turn would cause the system to
stop working. Markets, by their nature, simply do not allow for any such system to
exist.
The grail hunt is a highly destructive behavioural pattern that affects almost every
trader at some point in their career. Typically, the trader starts by learning a system or
strategy, which they execute for a short period of time. The strategy may prove
profitable almost immediately, or may incur an early loss. Either way, sooner or later
a loss will happen, and equally inevitably, a run of losses will occur together. At this
point the trader decides that this is not the system for them, and heads off in search of
a new method.
In jumping from system to system in this manner, the trader never gives a strategy
time enough to prove itself over the long term. All systems involve some losing
trades, that's the nature of the markets, but as long as a strategy has positive
expectancy overall (that is to say, it will on average win more than it loses), then those

losses are of no importance.
Action
As traders, we must accept that fact that losses are to be expected, and stick to our
chosen system for long enough to prove or disprove its expected long-term outcome.
In doing so, we break the grail hunt cycle and overcome one of the biggest obstacles
to our success.
As a final note on this subject, I want to add a word about forums and chat rooms.
Whilst these are undoubtedly excellent sources of information and ideas, they can be
very dangerous in fuelling the cycle of strategy jumping. The nature of these resources
means that they continually offer new ideas, and to the trader that means new
temptations. By all means test out or paper trade new ideas alongside a live strategy,
but beware of becoming a forum-follower and re-entering that pattern of always
jumping aboard the 'next big thing'.
Sin Number Two: Not Having a Trading Plan
"If you fail to plan, then you plan to fail"
I don't know who first said that, but it's a very sound piece of advise indeed. Planning
is something that is all too often overlooked by traders, and yet a well drafted trading
plan is one of the most important tools for success and profit.
In talking to struggling traders, I am constantly amazed at not only how many don't
have a trading plan, but how many don't even know what such a plan is. In fact a
trading plan is quite simple. It is a document that details every aspect of your trading
strategy. It is literally a blue-print for your trading methodology.
What should be in this document? Here are the most important areas it should cover:
Mission Statement - A defined objective for your trading. If you don't know what it is
you are trying to achieve, how will you know when you have achieved it? Having a
well defined goal is essential to success in any venture.
Pre-market preparation - Actions required before the market opens, setting up for the
trading session, reviewing economic calendars, and so on.
Trade entry rules - When to open a new trade, and just as importantly, when to stay
out and remain on the sidelines.

Trade exit rules - When to close (fully or partially) a trade.
Money management rules - How to size your trades and manage risk in a way that
will ensure you stay in the game.
Post market actions - Trade logging and analysis.
As anyone who has traded in a live market knows, we must often overcome our
natural emotional responses in order to execute our trades correctly. Cutting losses
and letting winners run can be easier said than done. By defining, as precisely as
possible, our criteria for entering and exiting trades, we have a reference that we can
use to help us overcome these responses.
The trading plan should be kept at hand throughout the market session. When we see a
possible entry coming up, by referring back to our strict written entry criteria we can
objectively look at the chart and make a informed decision about whether to enter or
pass. The same applies to exiting, whether the trade is winning or losing. Over time,
trading becomes almost mechanical and stress-free.
Action
We must have a written plan that defines all aspects of our trading, and we must
commit to following it to the letter. Only by rigidly sticking to our strategy can we
honestly determine if any problems in our trading lie within the system itself or within
our execution of that system.
Sin Number Three: Not Understanding Money Management
You might well be thinking that money management is a really boring subject, but
before you decide to skip to the next section, let me say that this isn't just about
making sure you survive long enough to turn a profit. It can also open up whole new
trading opportunities to you.
There are two distinct sides to this subject, and for some unknown reason, most
people only ever talk about one of those – survival – or what I call classic money
management. It is hugely important though, so let's cover that right now.
The idea is simple; firstly, we have a pot of money to trade with. Secondly, as we
have established, losses are a part of trading and so there will be times when the cash
in that pot decreases instead of increasing. So it stands to reason that if we don't

manage that cash correctly, it is entirely possible that we lose it all and can no longer
trade.
The concept behind classic money management then, is to trade in such a way that our
losses do not affect our ability to trade.
An example will make this clearer. Let's assume we have a starting balance of $5000.
We want to ensure that we can survive in this trading game for at least six months –
easily long enough to prove our strategy and ability, and to turn a profit. At its
simplest, we could say therefore that the maximum we would allow ourselves to lose
each day is $40. If we hit that limit, we would stop trading for the day. This would
keep us in the game for our six months assuming the worst case scenario of losing
every day - which would be quite some feat in itself!
We could expand this money management strategy to say that if we lost our maximum
limit of $40 a day four days in a row, we wouldn't trade on the fifth day of the week.
Furthermore, if we lost three weeks in a row, we wouldn't trade the last week of the
month, and so forth. If we were losing as badly as that, clearly something would be
wrong either with the strategy or our ability to execute it and so these enforced breaks
would offer a chance to step back and analyse where we were going wrong.
Assuming a $40 a day maximum loss, it stands to reason that we could not enter any
trade where the possibility for loss was greater than $40 – to do so would be to expose
our account to a greater loss than is permissible. So our daily limit gives us a starting
point for calculating risk and reward ratios for actual trading setups.
Not only does classic money management ensure we have a decent shot at getting
profitable, it gives us a psychological advantage too. Knowing beforehand the
maximum we can lose in any one day or on any one trade removes a huge amount of
pressure. We can enter a trade and assume that our money is already lost. By cutting it
free at the trade entry in this way, we feel less stressed about the trade and can manage
our position based on what actually happens in the market rather than what we want to
happen.
There is as I mentioned, another side to money management – position sizing. Many
traders will trade fixed position sizes based on the availability of funds. This is

perfectly valid, but it means that when looking at possible trades, they are inherently
limited in what they can enter. Dynamically adjusting the size of the position a trader
is willing to take in relation to the cost of the underlying instrument can open up
whole new trading possibilities. Let's look at that in a little more detail.
Many stock traders start by trading very small sizes, perhaps 100 shares per trade, and
then work upwards from there as they gain experience and funds. The same applies to
futures traders, although to a lesser extent because most futures contracts are worth
more per contract per tick than 100 shares (which equate to $1 per tick); in other
words stock traders have the opportunity to start smaller.
As stock traders increase their size, there is usually a tendency to remain with fixed
sizes per trade. For example, I know many traders always take positions of 1000
shares at a time, making every 1 cent move in a stock price worth $10.
Traders who work in this fixed way are missing out on an opportunity to increase the
number of trades available to them. Why? When a trader looks at a chart setting up,
one of the aspects of any potential trade s/he will be considering is the reward to risk
ratio and how it sits with their own money and risk management profile. For example,
let us assume we have an account balance of $30k, and a maximum risk per trade of
1% of account size, a common enough scenario. This gives a maximum risk of $300
per trade. Dealing exclusively in 1000 shares at a time, this means we are willing to
take a maximum loss of 30 cents per share on any one trade.
Certainly we have every chance of finding good trades every day where a 30 cent stop
is sensible, but what about the hot-stocks of the day that are showing great volatility
and range? A fairly recent example (at time of writing) of such a stock is AAPL,
which has put in some stunning intraday moves – runs of many dollars at a time. With
our 1000 share trades, most of these moves on AAPL will have been out of bounds
simply because it has not been possible to trade them with a 30 cent stop – indeed the
spread has been 25 cents or more for some of the time. If however, we were to reduce
our size, we could increase our stop without increasing the maximum risk to capital.
If we wanted to trade AAPL with a stop of 90 cents, trading 330 shares would expose
us to a maximum loss of $297, which is within our risk reward parameters. The bigger

expected return from the trade would make up for the smaller profit per cent gained,
and very often the moves on such stocks are proportionally greater than the required
reduction in trade size.
We can see then that by considering size in each trade, it becomes possible to actually
shift the reward to risk ratio in our favour, and open up a whole range of trading
opportunities that we may otherwise have to pass by.
Action
In order to give ourselves the best chance of survival in the market, we must define
clear money management rules for our trading, based on our available capital. Doing
so will give us the added benefits of relieving the psychological pressure involved in
taking losses, and opening up new trading possibilities that may previously have been
thought too risky.
Sin Number Four: Not Testing
Trading is a great business. It offers potential levels of income and freedom that most
people can only dream of. So it's quite natural that having got the groundwork out of
the way, the novice trader is eager to get clicking those buy and sell buttons and see
the profits roll in. But hang on – the preparation isn't over yet!
Imagine for a moment that you decided you wanted to become an airliner captain.
You spent time and effort researching the type of aircraft you were going to pilot, you
read some books on how to fly, and then one day you found yourself sitting in the
cockpit, lined up at the end of the runway. Clearly, without having actually taken
some time to learn how to fly this machine full of passengers, trying to take off would
be a disaster! So why is it so many traders believe they can read a book about trading
and then leap into the market without first getting some experience?
If you were going for the pilot's job, you'd take a training programme which would
undoubtedly see you getting some no-risk experience in a flight simulator. This would
give you the opportunity to make all of your early mistakes without crashing a few
seriously expensive 'planes in the process.
As traders, we are very fortunate in that we, like airline pilots, can practise and hone
our skills in a risk-free environment. Indeed we have the added benefit that we can

simulate our activity with high degrees of realism at little or no financial cost at all.
I am of course talking about paper trading. In the most basic sense of the term, paper
trading means that we follow our trading plan exactly as if we were going to put real
money into the market, but at the point where we would actually buy or sell, we
simply make a note of the current price instead of opening a live trade. We would
continue to manage the trade exactly as if we had real money in the market, and would
exit accordingly, again, writing down the exit price.
Going a step further from pen and paper, today's internet-generation trader can take
advantage clever software simulators which imitate a live trading platform. These
programs, often free, have the advantage of making the paper trading experience
much more realistic. They also cannot be cheated in the same way as a note on a piece
of paper, which is to say we cannot conveniently decide to erase a trade we later
decide was a mistake!
There are some who believe that paper trading is not worthwhile as it can never
reproduce the emotional stresses that are involved in live trading. Whilst that is true to
a certain extent, I would argue that if you are not sufficiently proficient at executing
your trading plan in a simulator, why would you be able to do so with real money?
Paper trading gives us a great opportunity to put into practise what we have learnt, test
new strategies, and tune our skills with no risk. Once a trader can consistently show a
profit on a simulator, they are ready to take the next step – live trading. Again, this is
not something to be rushed, and again, like airline pilots we can work our way up to
this.
Just as the pilot is probably not going to make his first real flight in a jumbo jet,
neither do we as traders need to take a full-size trade when we start for real. If trading
equities (stocks), we can buy and sell very small amounts at almost negligible cost. If
trading futures, we can usually start with "mini" contracts which are valued at a
fraction of the price of a full size version. Whilst this limits our profit potential as we
take our first steps in the live market, it very importantly also limits our potential
losses.
With the huge array of software tools available to us, along with discount brokers

offering cheap trading instruments, there is no need for any trader to get seriously
burned on their first outing into the market.
Action
We must commit to testing and practising our trading in a risk-free environment
before putting our capital into the live market. Only when we can show consistent
profit on a simulator, should we move on to trading real money, and then only in
small doses.
Sin Number Five: Not Putting In The Necessary Effort
It's a strange phenomenon that seems almost unique to the field of online trading;
people believe that they can read a book, open an brokerage account, and start making
huge amounts of cash just like that.
I used the analogy of an airline pilot in the previous section, so let's continue with that
theme here. Not many people would expect to decide on Monday that they wanted to
fly long-haul airliners, buy and read a book on the principles of flight on Tuesday,
then start work as a Captain on Wednesday. But with trading, such a short learning
curve appears to many to be expected.
Whilst I certainly agree that - proportionally in relation to other activates - day trading
can provide much greater returns for much less effort, it nonetheless does require
some effort to get going.
Trading, like any other skill, takes time and commitment to learn and become
proficient at. However, unlike many other skills, that time to become sufficiently
adept need not be costly, or at the expense of existing obligations. In other words, a
novice trader can learn the markets and practise their trading whilst continuing in their
day-job, and without significant outlay.
Indeed I would advise any would-be trader to have a steady source of income when
they start out. The absolute need to generate a profit can have a hugely detrimental
effect on trading decisions.
A problem a lot of student traders I work with have is that they start out with a healthy
dose of motivation, but when the going gets tough they start to lose interest. Suddenly
it becomes too much like hard work. The first losing trades make for a powerful

reality check. Motivation goes out the window, and plans to quit the day job are
quietly forgotten about.
Part of this problem is down to unrealistic expectations at the outset, and part is due to
a lack of accountability. In a regular job, we're normally answerable to someone. If
something doesn't get done, there's usually someone higher up the food chain ready to
kick our butts.
When we're trading our own account, that heirachy no longer exists. We're only
accountable to ourselves. For many people, that's a first. The solution is to get back to
that written trading plan. If the plan has been well thought out, it will include the all
important mission statement, and perhaps a set of attainable goals. Re-reading these
every day will help reinforce self-accountability and motivation.
Trading isn't difficult (something I'll talk more about in the next section), but neither
is it an instant source of riches there for the taking. Like anything worthwhile, you get
back what you put in. The difference between trading and other activities is that once
you have mastered the skill, relative to the amount of time you spend "working" you
will get back much more than you ever put in!
Sin Number Six: Overcomplicating It
From what you have read so far, you might by now be wondering if this trading thing
is really worth it. What with all the planning, testing, and continued effort, it perhaps
seems much more complicated than you first thought.
It's easy to get caught up in the details, but if we take a step back for a moment,
trading really need not be complicated at all. Finding a strategy to work with can take
as long or short a time as you like . There are plenty available off the shelf (including
within my own books, naturally!) Formalising that strategy into a written personal
trading plan is something that requires only a couple of hours of time up front, after
which it can be refined and added to as you go along.
As we see then, we can get very quickly to the stage where we are ready to begin
simulated or paper trading. It's at this stage where lots of traders really start to
overcomplicate matters.
If you remember a little way back in the first sin, I talked about strategy jumping. A

close relative of that particular problem is strategy morphing. The cycle is very similar
indeed. The trader starts trading their plan with all good intentions. Things may or
may not go well straight away, but sooner or later as the market's behaviour ebbs and
flows with and against the strategy's strengths and weaknesses, losing trades will
inevitably occur.
At this point, the strategy-morpher gets scared. They don't like to give money back to
the market, so they decide to try and modify the system to filter out trades like the last
losing one. They begin to add indicators to charts, coming up with new ever more
convoluted combinations, furiously testing to see what cuts out the most bad signals
whilst leaving in place the good ones. A few times round this loop and their chart
starts to resemble something a seismologist might be more used to seeing than a price
chart!
I'm not saying that modifying and testing of new systems and ideas isn't valid, but
when it's done at the expense of trading an already profitable system, the trader ends
up chasing their own tail, and loses out in the long run.
Remember that every strategy will have losing trades. When those losses are within
the normal expectations of the system, there is no need to start fiddling. Stick with it
and as long as the system has positive expectancy, the law of averages will see you
through those drawdown periods and you will make money. Paper trading the system
thoroughly beforehand will give you the confidence in the setups to be able to do this.
Markets are complicated, but trading them need not be. Simple really is the best
policy. A simple system makes it easier to spot entries and exits. It makes for a less
stressful trading day, and consequently a less stressed and more profitable trader.
Almost all of the successful traders I know have found this out the hard way, by trying
the complicated route first.
Action
To avoid sim number six, you actually need to do less work. Put in a little effort up
front in the planning stages, and then relax and just follow your plan to the letter.
Thinking too much can damage your trading, not to mention your stress levels!
Sin Number Seven: Not Taking Action

This is perhaps the biggest sin of all, and yet should be the easiest to overcome. For
every trader who opens a brokerage account and starts placing trades, there must be a
hundred more who had every intention of doing so, but for one reason or another,
never actually took that ultimate step.
It's a blindingly obvious statement to make I know, but you cannot make a profit from
the markets if you don't actually start trading them! Why do so many potential traders
buy the books, read the forums, and study the charts, but never actually place a trade?
The most common reasons I hear are these:
Fear: "I'm worried I'm going to lose too much money"
If you trade on a simulator, you can't lose a penny. Today's technology makes
simulated trading more accessible and more realistic than ever. Having a go risk-free
will either give you the confidence to take the next step, or will prove to you that
trading really isn't your thing. Either way, you've got nothing to lose by trying.
Time: "I'm at work when the stock market is open, and I can't trade from my day job"
There are stock and futures markets in every developed country in the world. With the
wonder of the internet, we can trade them all. That means that when you have some
spare time, there is a market open somewhere. There's no need to give up the day job
to try out trading.
Time: "I don't have time to sit in front of a computer all day learning this stuff"
Half an hour a day is enough time to learn the basics of trading inside a couple of
weeks. After that, half an hour a day of practicing - reading charts, taking paper
trades, analysing markets - is enough to get some really solid experience. Can you
find half an hour a day? Perhaps you could get up half an hour earlier, or go to bed
half an hour later. If you commute, you have time to listen to an audio book, or read a
regular one. I know people who work two jobs, have newborn babies at home, and do
charity work or cope with disabled or housebound relatives and yet still manage to
find a little time each day to trade. Anyone who really wants to trade can find an extra
half an hour a day.
Money: "I don't have enough cash to trade with"
As trading becomes ever more popular, and brokers try and reach out to bigger

audiences, minimum account levels are falling. If you have a few hundred spare
dollars (or equivalent in your own currency), you can start trading. Having said that,
never trade with money you cannot afford to lose. If losing your starting capital is
going to make you homeless, you really shouldn't be trading with that cash. However,
there's no reason you can't paper trade while you save up that pot.
Confidence: "I don't think I can do this, it's not for me"
If you really think trading is not your thing, of course there is no point in pursuing it.
If, however, you simply fear that you won't succeed for whatever reason, then you
could be missing out on a great opportunity for nothing. Get yourself some free charts
and a free simulator, or even a pen and paper, and have a go. If you don't try, you'll
never know!
Action
Ultimately, only you can take the next step to becoming a profitable trader. It's a sad
fact that many who read this will never take their trading dream further. But those few
that do will be well on their way to success, profit, and trading freedom.
More From The Author
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