The 7 Deadly Sins Of Trading

Trading is wrought with all sorts of trading sins, any one of which can lead you down the path to making a suicide trade.  And although there are probably hundreds that I could come up with, these seven are perhaps the deadliest ones to avoid and help make my post title sound more liturgical.

Playing Earnings –  Holding into earnings is just begging to be hit over the head with a black swan.  Not unlike playing Russian roulette, even if you have the odds on your side, in the event that things go against you, the effects can be so devastating that your account may not be able to recover.

There are complex ways to play earnings with options that can limit your downside, or help protect the profit of an existing open position, but for the average trader it is just best to be flat or have a very small position going into an earnings call.

Pulling Stops – Every 5% loss starts with a 1% loss.  So does every 10%, 25%, 50% and 100% loss.  Just don’t do it.

Trading Tips – I have probably been give more than fifty “sure thing” tips since I began trading.  The thing about tips is that they always sound like they have rock solid provenance, yet the vast majority of them are a bust.  Don’t be fooled by the story or the storyteller, who may actually believe the info they are telling you.

Once I got a tip on Home Base, which a friend assured me was going to be bought out by Lowes.  His “source” actually saw the deal memo on the desk of the CEO’s secretary. They eventually went BK.

Another tip I once got was that Platinum Software was going to get bought out.  This tip came from the cousin of Platinum’s CEO, and it turned out to be true, they did get bought out.  Unfortunately it was a “takeunder” where the target company gets offered less per share than it is actually trading for.

Stay away from trading off of tips.  Remember that line in Wall Street where Gekko asks Bud Fox, “What are you, 12th man on the deal team?”  By the time you hear about a tip, Bud Fox (pre “I bagged the elephant Marv”) will look like an insider compared to you.

Technical Rationalization –  This is a sin that those who use technical analysis are often guilty of.  To better explain it, let me channel the spirit of my dinner guest from last Friday night.

“It’s not so bad.  It’s not so bad.  It’s not so bad.  It’s not so bad.  It’s not so bad.  Hey, why is that bclund guy ripping open my abdomen and pouring drawn butter all over me?”

In trading terms it work like this…

“My stock failed a breakout, but it’s still in the upper end of the range.  It’s still holding the 5ema.  The 9ema.  The 20ema.  It’s still holding the trendline.  Still above a support level.  It’s below the bottom of the Bollinger Band.  Still above the 100sma.  The 200sma.  Still trades on an exchange.”

You can always find a technical reason to hold a losing stock if you want, which is why it is critical to use price action and money management techniques in tandem with technical analysis.  Don’t allow yourself to rationalize away your account equity bit by bit or you will end up in worse, and less delicious shape than my lobster friend.

Chasing – Very rarely does chasing in any aspect of life pay off.  You chase fashion and you look like a Project Runway reject.  You chased that girl around in college and now you’re married to her, so that didn’t work out too well (note to self, remember to duck when entering the house tonight).  It’s no different when trading.

Here is the thing about chasing; there is almost no way that you can chase a stock and still be able to use good risk/reward ratios on the trade.

By definition, if you are chasing a stock it means it is breaking out (or down) through a congestion zone,  a S/R level, or a pattern, all of which you key off of to set your risk ratio. The farther you have to chase a stock past those inflection points, the larger your risk factor becomes.  Even worse is the psychological aspect of chasing.

When chasing you often feel you are “missing out” on a move, which puts you not in a mental position of power and control, but of weakness and helplessness.  That is not a good mindset with which to enter and manage a trade.

Avoiding Decisions – A very good trader I know once told me that whenever he began cleaning his office, he knew he was in trouble in a position.  It was a defense mechanism and his way of avoiding having to make a decision about an open trade.

“I’ll just give this position some more room,” he would say, and then organize his desk, empty his wastebasket, and neaten up his bookshelf for 30 minutes or so, hoping that when he came back to his screen his position had righted itself.  More often than not, it didn’t.

I have heard of successful traders who put on trades and then turned off their computers or even left their offices until near the close of the markets, the most famous being Ed Seykota from the ‘Market Wizards” book.  But these traders had stops and often target orders live and in place before they “checked out.”

They were avoiding the markets in order to “take themselves out of the trade” and let it work, not to avoid dealing with a position that was going against them.

Bottom Picking – The problem with bottom picking is that it can work for a while.  Even if you don’t pick the exact bottom of a stock or the market, you can sometimes get in close enough to the bottom and then make some good money when the rebound comes.  This gives you a false sense of security that you know what you are doing and deceives you into thinking you have a sound methodology, even though you really have no methodology at all.

It always works until it doesn’t; and not unlike trying to play earnings, the losses when it doesn’t work are so devastating that they can end your trading career.

When the markets are imploding, the key is to wait until you think they have hit bottom, and then wait a little bit more.  When you think it’s getting bloody, wait for more blood.  When you think the financial structure of the markets is about to collapse, kick back and have a beer for a while.  But most traders don’t have the patience for this, nor to they have the discipline to take small initial positions, saving enough dry powder to add when the first “bottom” fails.

Hey, I said “seven deadly sins” but I am a giver, so here is a “bonus” sin.

Blaming – There has always been somewhat of a “blame game” in trading, but in recent years it seems to have reached epic proportions.  Brokers, market makers, HFT, algos, analysts, The Fed, Bush, Obama, Greece, hedge funds, the list is endless of who I see getting the blame for people losing money in the markets.

If you blame anybody but yourself for your losses you are destined to blow your account up and get washed out as a trader; it’s as simple as that.

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  • Mario

    good list. Chasing is my weak spot. I’ll see a move early on but not take a position until “I am sure,” but one of the major aspects of trading is that you are NEVER “sure” until it’s in the past. Traders are prophets searching for profits. 😉 It’s annoying, b/c I get washed out too much and then that hurts my future performance, which washes me out even more (when I should have won if I stuck to my system)…so it’s continually about me getting back in alignment with myself and with my trading strategy before I take another trade. I need to become more willing to take calculated risks (potential affordable losses or “business expenditures”). The idea being that the winnings exceed the expenses + commissions. I am working on it, but boy it can be tough for me.

    Thanks for this great post!

    • Brian Lund

      Thanks for reading it Mario.

      • Chip

        Probably comes under “Chasing” but my weaknesses have always been sometimes trading just for trading’s sake, despite the lack of a good technical setup or any true conviction–and those trades almost never work out–but worse than that has been adding to losing positions to lower basis. That one nearly took me out the markets permanently in 2008. I still do it occasionally, almost never with good results.
        Great list and enjoying your blog!!

  • frank

    Been there done that!

  • Alex

    You must be speaking to the extremely short term trader when you say “don’t hold into earnings”. There’s no way you ride up a long term uptrend without holding through an earnings call. And usually if you do your homework you have a sense of what those earnings may be and position yourself accordingly. But there are exceptions of course. With earnings calls every quarter I think better advice is to say “Don’t open a position before earnings (or immediately after usually), especially not a long put or a long call based on what your expectations are. Unless 1-2 month trades are long term for you and you enjoy paying commissions and taxes, this advice doesn’t really make sense.

    • brucy

      that’s a trading advise list , not investment advise. trading means timing highs and lows . going for a trade before earnings is a mistake , thus relevant in this list.

    • Brian Lund

      Yes I think most who read my blog are short term traders. Swing trading has different rules.

  • CallaLilly101

    Yes yes where can I sign up, sigh

    How about (true) Confessions end of the week

    Bottom picking is my guilty thing … and, sniff, all those little “oops, really more down” hurts

    Volume, conviction, all those dull things work don’t they.

    • Brian Lund

      We all have our “sins”…lol.

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Brian C. Lund

Brian C. Lund

Great father. Good friend. Decent trader/writer. Lacking husband. Solid drummer. Sometimes funny. Often A-hole. Terrible poker player. Too smart. Punk rock. Work in an ice cream shop.

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