The Seven Deadly Sins

[10/04/26]

6th Century Christian theology and the ever-continuing behavioural traits translating to trading errors in the modern world, whether discretionary or systematic process:

Pride [Running stop losses] - Believing a market or trading thesis to be correct, whilst being unwilling to admit defeat, when it is served by the price action. This sense of ego or pride is heavily linked to the loss-aversion bias. The premise of which is that traders fear losses more than they value equivalent gains, which leads to disobedience of stop loss levels, re-entry of losing trades and ultimately throwing good money after bad. Ultimately: ill discipline, not admitting you are wrong. This is something I have been battling with in recent years. More recently, not the stop-loss side of the equation, as the accountability of the Macro Blog helps me stick to the levels I suggest at the outset of the risk deployment and there have been many occasions that I have cut risk and been wrong this year. I also buy options a lot to gain leverage, which of course have a natural depreciation floor. However, when I am not getting stopped-out, I have been tending to book profits early. My desire to succeed in a new venture is ruining the risk:reward ratio designed, hence is a form of pride creeping into process, which will ruin my sharpe and therefore my results, in the long run.

Greed [Not booking profits/sizing too large/concentration risk in the book/trading before the tech level breaks] - Greed takes many forms within trading - four of the more obvious occurrences aforementioned. The former is of course a good problem to be having; the latter three can be terminal in the long run. A good example of this is the recent JPY long that I have been circulating. High expected value is leading to over-sizing, which when wrong - which it currently is - can be painful. I recently had three trades on that were all derivatives of a JPY higher thesis, so had to temper my excitement and stop out of a portion of the risk. The wall street adage ‘greed is good’ is problematic and cycle after cycle it is proven incorrect. FX trading in particular is a game of inches and I am increasingly learning, when trading my own capital, that it is only discipline that leads to survival and stems bleeding. Focusing on Y/E results is not conducive to steady returns and a honed process. Of course, compensation structure more generally within the buy-side in particular can breed emergence of greed or personal payout asymmetry when deploying capital, which is why firms and risk managers enforce soft and hard stop-loss limits on PMs. Another manifestation of greed within trading or portfolio management, which is very easy to model, is the mean reversion in P&L following multi-sigma positive days. ‘Giving back’ is real and is evident on most P&L graphs. Reducing a book into a profitable market move will always feel counterintuitive; a blend of greed and FOMO.

Lust [Trading ultra-high-vol markets/collecting TRY-esque carry/selling vol] - When things break, liquidity is at a premium and careers/years are made or lost in these moments. It is incredibly difficult to stand aside and watch XAGUSD or Crude trade 10-20% in a session, as both have done in Q1 this year, without getting involved. Similarly, vol-selling in either outright form to harvest yield by selling contracts, or implicitly by collecting carry at the risk of sharp nominal devaluation, are examples of the siren call of heroic returns, at great and often understated risk [see more on the latter below]. Risk managers, desk heads, nominal position limits and VaR calculations are all designed to regulate, however the attraction is difficult to resist and is ultra-important for retail traders, when these mechanisms don’t exist. “Have I got enough in it?” is as dangerous as the desire to sell the high/buy the low, in a bid to ‘drive the perfect race’.

Envy [FOMO] - This is a big one, and is evident almost daily, when you follow a market closely enough. Markets that are CTA or model-dominated will contain coalescing of activity or order-flow through key levels, which meld with the human/voice trader activity and the triggering of stop loss orders through said inflection points at the same time. Similarly, liquidity vacuum surrounding Tier 1 data prints often leads to high activity within a wide price range, with mean reversion common. The psychology of human traders chasing in either direction in the same moment is an amplifier. Both scenarios, requiring FOMO to be personally managed or accounted for (staggering entries, for instance) are on a shorter time-frame, however the same FOMO exists on the broader macro moves, as a component of every thematic momentum trade. Bitcoin, precious metals and AI stocks are as great a demonstration of FOMO and compounding interest as the famous historical bubbles studied. The point is that it is always difficult to distinguish FOMO from fundamental, but checks and methodology can be introduced to suppress the former, whilst guaranteeing some form of participation in the latter.

Gluttony [Over-trading one instrument] - The overlap with greed is clear, however here I want to focus on the bias of repeatedly trading one product or instrument. Sure, you can have an edge in concentration and product knowledge, however the further you move from the ‘inner ring’ of interbank specialised trading, to the own-account/PA trading model, the edge shifts from information asymmetry to variety of product and freedom of process. In a seat with a broad mandate, focussing too much on one trading instrument can mean inefficient mental capital deployment and ‘missing the wood for the trees’, i.e. missing-out on some very clear and high EV setups, with meaningful stop-loss levels, because you do not zoom-out enough (which in turn aids your macro puzzle-building) or leave your comfort zone, or you simply do not have the remaining capital to deploy. When trading a margin account, as I am, another manifestation of gluttony is over-leveraging. Margin utilization is clearly measurable and net exposure coverage comes down to one number, however the concept of readily-available intraday borrowing to maximise exposure is something incredibly tempting that needs to be kept in check. This same concept means that MTD/YTD returns are amplified, when not correctly divided by the leverage ratio, as they should be, which can also introduce an overconfidence, mistaking leverage for trading returns on a normalised basis.

Wrath [Revenge trading] - ‘Uncontrollable anger, hatred or the desire for vengeance’ is the biblical description. In the sphere of trading, I think revenge is the manifestation. Believing the market is wrong or taking a loss personally can lead to ‘revenge trading’. This was one of the earliest emotions I experienced in my career as a trader. Repeatedly stopping and re-entering the same position, being unable to walk away, only to ultimately destroy my average entry on a trade or amplify a drawdown unnecessarily. Sometimes, I find that taking a few days away from the market when I am ‘cold’ or clearly not seeing things correctly can speed up the closure or recalibration phase of the post-trade autopsy and allow me to reset my view on the world through a risk-free lens. Acting with mental clarity at all times, with emotion not only impossible to decipher externally, but also in-check internally, is the ultimate goal.

Sloth [Hesitation/bias to sell vol] - Two interpretations come to mind here. The first is slow adaptation to critical new information. Tier 1 data that invalidates a thesis or a regime-shifting headline that you question the validity of, only to miss out on a great trade or conversely cost yourself by watching said headline drive your open risk towards your stop-loss. A great recent example of this were the German fiscal headlines of March 2025 that catalyzed a >6% rally in EURUSD from 1.0350—>1.0950. The second is the rather opportunistic human trait to do little/achieve lots. “Work smart, not hard” is the positive format. Cutting corners or ignoring clear risks of taking shortcuts to “the easy way out” is the negative. Economic concepts such as the poverty trap accentuate this. In trading, I think the ‘picking up pennies in front of the steamroller’ adage is the most appropriate. The recent example of this, from exactly the same month as the prior example, is short USDTRY exposure. Implied carry of +30/40% annually was an attractive proposal. You only required a small exposure to hit year-altering yield/return levels. I can confirm that this allure was tough to resist; in fact it was often only risk manager/position limit constraints that prevented further progress towards the siren’s call, for a period of more than 18 months. Unfortunately, ignoring the danger of the potential adverse movement of a centrally-managed currency saw a c.15% drawdown in a single trading day cause unimaginable pain to these previously rather comfortable ‘long carry’ positions, wiping out any forecasted returns and more, whilst forcing crystallization of the losses.

I still make a good deal of these errors myself and am focusing this year on minimising biases, hence the train of thought spawned whilst reading about recency, anchoring, confirmation and loss-aversion biases. The market comprises human behaviours, given the nature of the agents - either acting directly, contributing to investment committees, or engineering programs. Keeping the above ancient biases in check can of course help with decision making and thus refining your process… although it feels to me that this is a lifetime of mastery; perhaps an impossible task!