Commodities guru Kevin Kerr was featured in The Daily Reckoning presenting his take on the Seven Deadly Trading Sins.
GREED IS GOOD! OR IS IT?
by Kevin Kerr
The highflying 1980's movie Wall Street coined the term, "Greed is good. "Well, that's fine in the movies, but in real life trading things are very different. As the old saying goes; "Bulls make money, bears make money, and pigs get slaughtered."
There are many rules to successful trading, but what I find even more important are the "Seven Deadly Trading Sins" to avoid at all cost. I always teach them to my readers and clients before I suggest they ever make their first commodities trade.
1. Greed: In reality, greed tends to keep a trader from closing out a position when a reasonable profit has already been made, in the hope that the commodities futures or options price will go even higher. Staying in the market for too long is one of the most common reasons I see people consistently lose money in these markets.
When we seek more, and that's more of anything, we tend to make rash or impulsive decisions, and ultimately this negatively affects us. After several winning trades, the feeling of invincibility takes over and completely eliminates the ability to be logical. This in turn, ultimately leads traders into trades that they normally would not have entered.
2. Over-Trading: That feeling of invincibility we get from greed often leads some traders to feeling the need to hold positions in several markets, at all times, on every trading day. Often traders forget that standing aside is a position. Not long, not short, flat.
Sometimes it's simply best to stand aside and avoid holding any position in the commodities markets at all. This allows a trader to hold onto equity and trading capital for those truly profitable opportunities. Holding various positions in all types of commodities at one time is not only complicated, but next to impossible to follow. The two things it does achieve are both negative: complicating your trading plan, and increased transaction and brokerage costs.
3. Fear: Fear will have even seasoned traders second guessing themselves and pulling the trigger too soon on trades or holding positions until the bitter end. Fear leads to trading decisions that become unmanageable. This fear (or insecurity) leads to a false-pride, which tends to keep a trader in a losing position for far too long. The main mistake is the reluctance of a trader to admit that the original trading decision was incorrect.
A winning trader must keep their emotions at arms-length in order to consistently achieve their trading goals. Fear is the biggest reason traders lose their commitment to their original positions.
4. Lack of Commitment: There are some commodities traders who are unwilling to make a serious commitment of time and effort to study and watch the markets. It is also important to engage in training and education that allows them to learn about technical and fundamental analysis, new trading systems and methods, order routing software. Those who do not commit themselves and their time are destined to fail.
5. Over Analyzing: Or as they say in the industry, "paralysis by analysis" is another big problem for traders. With today's vast wealth of information and disinformation on the Internet and elsewhere, we can literally be bombarded with analysis. This analysis can be debilitating and the most important skills a trader can learn is how to pick a trade, how to be disciplined enough to execute it at prices they choose, and then how to hold the trade until it reaches the profit target they set or is stopped out. More often than not, a trader lacking discipline and commitment will change strategy midway through the trade and begin second-guessing the trade immediately.
6. Lack of Acceptance: A time waster for traders, and one of the biggest hurdles they run into, is acceptance. The inability to accept and limit losses is, in my opinion, the major reason commodities traders fail consistently. Some traders simply hold onto a losing trade for dearlife,swearing it can't go any lower.
But of course it can, it can always go to zero. Compounding this mistake is the practice of adding to an already losing position; sometimes called "averaging down," when in fact it should be called what it really is: stupid! Losses are part of trading, and hopefully for the trader, a small part. The sooner a trader accepts that losses come with the territory, and learns to limit losses in advance the more profitable and stress free they will be.
7. Boredom: And rounding out the seven deadly trading sins is boredom. Simply put: trading for the sake of trading. This is never a good idea. To be a good and successful trader you need to have conviction and actual passion for what you're trading; some days it's the only thing that gets you through without going insane.
Boredom is the worst excuse for trading. Sometimes the best thing to do is for a trader to walk away from the trading screen, shut off the cell phone, turn off the business channel, and go for a walk, or even take a nap (but not at the office, which could be bad for your career). The point is, by changing our actions we can change our thoughts and perceptions as traders. By doing so, we trade with a clearer head, better logic, with less emotion.
The seven deadly trading sins are not carved in stone, and there are many more, but what's important is to recognize your emotions, and how they affect your investing approach. There is no confessional for traders, that penance comes from our brokerage firm when they mark our account to market at the end of the day. The best way to avoid this is by not committing any of the seven deadly trading sins in the first place.
for The Daily Reckoning
Editor's Note: If you are looking to get into the world of commodities trading, then you should pay close attention to the above essay. Kevin Kerr's expertise in the commodities markets is unparalleled. In fact, if you had been using his commodities trading service, Resource Trader Alert, you could have made money on 26 out of 30 plays in 2005. That's a phenomenal success rate of 87%. Or a winner every 8 out of 10 times you put money on the line.
To learn more about Resource Trader Alert, and to find out what special offer Kevin has up his sleeve, see here: