Participants come into the trading game from all walks of life, seeking to build their fortunes through the fine art of speculation. There’s no gating process to stop the wrong people from opening positions, so the population contains all types, from disciplined journeyman focused on risk management to mindless gunslingers throwing money at hot products or concepts.

In between, scores of poorly trained individuals grind it out, posting their fair share of winners and loser​s, while failing to book the annual returns needed to make the enterprise worthwhile. These folks eventually transition to one side or the other of the educational spectrum, by learning the game well enough to pay the bills or blowing out their accounts through deadly and destructive habits.

Sadly, the majority travels the destructive path because successful trading requires hundreds of hours of preparation and observation, while the most popular mindset views the financial markets as a casino in which fortunes are made by throwing money at binary bets (for more see The Casino Mentality In Trading). In reality, profitability requires grinding strategies for months or years until they perfected, finally generating the trading edges needed to beat the market (for more see The Vital Importance Of Defining Your Trading Edge). 

Choosing The Correct Path

The siren call of working at home, earning a living, is a powerfully attractive force when stuck in the rat race of commuting and company rules. But to make this dream come true, you’ll need to learn lessons promptly and take the pursuit as seriously as school, career or interpersonal relationships. Time is never on your side when learning how to trade because each bad decision reduces capital while sapping the mental strength needed to work through adversity.

Choosing to play the game properly through education, observation and mentoring from trusted individuals shifts the odds in your favor, but it’s still no guarantee of long-term financial success. Improve the odds further by avoiding 10 deadly habits that interfere with your carefully laid plans whenever you stray from the relatively narrow path of risk management.  

Folks who trade without understanding or caring about well-lit pathways invariably develop destructive habits that, left unchecked, trigger washout and failure. The market knows how to deal ruthlessly with mediocrity and laziness, activating the Peter Principle in which everything that can go wrong does go wrong, often triggering catastrophic losses.

Deadly Habits

Let’s summarize 10 of these deadly habits.

Overtrading: Each setup needs to stand on its own merits, meeting a set of rules that supports our decision to take risk. Too often, the adrenaline rush of market exposure becomes the primary motivator, inducing destructive traders to open positions just for the rush of winning or losing. This habit is especially damaging after a series of random winners hypnotize these folks into believing they’re invulnerable.  

Playing Hot Tips: The best positions follow a checklist of characteristics that need to be met before entering the market. This process requires substantial effort, inducing weak-skilled traders to ditch the required work and grab hot tips from the financial media, Twitter or chat rooms. These plays rarely work and are especially risky because the trader doesn’t understand the setup and won’t know when to sell if things go haywire.

Overleveraging: Brokerage accounts come with built-in margin capacity that attracts destructive traders like moths to the flame, but it can take years to learn when to use margin and how to use it properly. In the meantime, these folks throw money at the market, using margin to maximize all sorts of positions in which high risk can trigger career-ending losses.

Doubling and Tripling Down: Destructive traders quickly learn they can lower their cost basis by adding to losing positions. It feels good and natural because they’re blind to the risk of a security moving against them for weeks or months at a time. Making things worse, they believe the mantra that a loss isn’t a loss until the trade is booked, when in truth every tick against your position lowers your equity

Relying on Feelings: Traders can choose to learn the game through an educational process or just feel their way forward by reacting emotionally to the last sound bite or price chart. Fear of missing the move takes absolute control in this scenario, sucking the trader into exposure at the worst possible times, when everyone else has already taken their money and gone home.

The Need to Be Right: If your life away from the financial markets isn’t going well, don’t trade, because trouble in your personal life will bleed into your profit and loss statement. This is especially true with empowerment issues, which raise an unhealthy desire to be right in all situations. This subconscious force transforms each position into a referendum on self-worth as opposed to a thoughtful bet on higher or lower prices.

Taking Earnings Bets: Destructive traders love to play the market casino​ during earnings season when securities can move 10% to 20% overnight, in reaction to quarterly results. They place big bets ahead of these reports, believing the path to wealth requires a series of binary outcomes as opposed to building wealth one tick at a time. That’s why highly skilled traders sit out earnings reports, unless they know how to reduce risk through options plays.  

Fighting the Trend: Financial legend Martin Zweig told us “the trend is your friend” in his 1986 classic Winning on Wall Street, but destructive traders still haven’t gotten the message. These folks routinely sell short at new highs because the security has to fall or go long at new lows because it’s gotten too cheap. In both cases, they fail to understand that trends can persist far longer than anticipated and carry well beyond artificial price targets.  

Blame Game: Destructive traders blame everyone but themselves for losing money. Market makers and specialists took the blame 20 years ago, while high speed trading algorithms (HFT) and central bank manipulations are major culprits in our modern environment. Not surprisingly, this attitude invariably extends into their personal lives, with parents, spouses, kids and bosses ganging up to make their lives miserable.

Having No Exit Plan: You don’t know when to take the profit or loss if don’t have an exit plan. It’s incomprehensible to a well-skilled trader that anyone would play the financial markets with open-ended risk, not knowing when to book a trade and move on to the next position. But this happens every day with the destructive trader, who holds a position until an emotional breaking point forces an exit.

The Bottom Line

Market participants choose between a slow and arduous path of discovery through education, observation and mentoring, or take the lazy path and develop all sorts of of deadly habits that eventually lead to catastrophic losses.