Unlike the movie “Seven” that portrays the seven deadly sins: anger, greed, sloth, pride, lust, envy and gluttony, version of the movie would have probably been about 60 mins shorter…And in my version, they wouldn’t be called deadly sins as much as they would be called…er…habits. Hereditary habits. Only 3 of the 7 above… Fear, Sloth & Pride.
Fear leads to greed, envy and anger. Sloth leads to hope & gluttony. And pride…leads to them all. Pride creates everything out of nothing, and returns it back just as quickly…Fear, Sloth & Pride are the basis of every rise and fall of every dynasty, the rise and fall of every new technology, and the instantiation of every major and minor cultural religion.
Understand that hereditary habits are within all of us. So, how do we prevent others from taking advantage of our primal instincts, and instead, use these traits to take advantage ourselves.
- Fear –People fear the news. Always be one step ahead of people’s fears. They will react to the news, so you must understand how to counter-react to the people (contrarian). You are a retail trader and surely a smaller investor than most big money (institutional investors, banks & the wealthy). Furthermore, using people’s “rational” psychology helps predict their nature using certain trading techniques (technical & statistical analysis). Understand that whether you’re trading momentum bands, statistical oscillators or even Fibonacci sequences, you’re investing people’s psychology.
- Sloth — Trading technology & the evolution away from floor trading has given every retail investor similar advantages to one another. For one thing, all the necessary tools and equipment are at our fingertips. It is also a dis-advantage. It has given the banking & financial institutions the ability to take advantage through proprietary trading floors using un-regulated techniques through less monitored exchanges. Sloth has led way for the big institutions to take advantage of the little retail investors, and has allowed for even privately funded, government entities (Federal Reserve) to get into a day-trader’s mentality. Hardly an environment for the little guy. Yet, while the little guy has small chances for arbitrage or speed-based algorithms, they do have the ability to stick with the “fear”. In cases where the big money & trading algorithms are at a high (volume), investors and traders now have the tools to monitor these predicted movements and follow the “smart money.”
- Pride — This one goes the longest way. Because pride is our survival. It’s our lineage. It’s our ability to adapt. It’s our ability to convert our fear and sloth into success. It’s how we win. Understanding the older trader’s adage that you only have to be right 51% of the time to be profitable is a good start, but realizing that even 25% or 30% right can be even more profitable. Spread tactics that minimize risk, arbitrage tactics that take advantage of disparities in less liquid markets (or less watched markets at least), and even understanding correlative properties between various market sectors and business cycles can all create sizable advantages that keep you winning. Your pride should dictate how hard and smart you work at understanding every facet of the market to put you in the best position possible to out-duel the market and win your trade.
Just remember that investing and trading doesn’t have to be scary. It’s in our blood to be the best we can be, and to understand how to use our hereditary habits to adjust to what’s going on in the market. We all want to be great. But listening to our innate skills and adapting to our environment are the only ways that we can be more successful at attaining it.
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