Trading to Win? Break Those Bad Habits
We are all creatures of habit, and with so much going around us in our lives at the speed of light we tend to fall into some set routines. That is often the case for us as option traders, and while some routines are efficient and allow us to make quick decisions, others can be quite harmful and cause some dangerous missteps. Many of us are unaware of these habits, they become instinctual.
When that occurs the bad habits become tough to break. Our habitual characteristics are different but when it comes to making money in markets many of them are similar. Let's crack open the egg here and see if there are a few habits we can change to help make us better traders and investors.
Bad Habit 1: Averaging down on an investment is a habit we are taught from the beginning.
'Buy the dips' is what we are told. From an investment standpoint that is sage advice, but for traders - especially option traders - that can be terrifying. Understand how money flows into markets and where it is coming from. Institutional investors make up 80% or more of the action, and while high frequency traders get all the headlines, they are a minority in the game of dollars. Recognize when momentum takes hold, as we identify markets as a bidding machine, not one to take advantage of falling prices. Consider this: the markets are more like Ebay (auction), and not like Walmart (falling prices). Stocks have value, and will go to the highest bidder at all times (if there is one).
Bad Habit 2: Going 'All In'
We talk about this one often in our chat room. Putting all of your eggs in one basket is not just impractical but it's just plain stupid. Now, some have their own definition of what 'all in' means, but for our intent here it is investing all dollars. It is just simply foolish to do this. Not having any cash at the ready for new opportunities will hamstring you when ideas come across your screen. Let's also remember the stock market is not risk free nor is it immune to volatility. While the current volatility index is low (indicating low probability of big moves), this is a dynamic vehicle and any whiff of bad news will leave nothing but sellers to deliver some pain to buy and holders. ALWAYS have some cash ready, so that means sizing your trades correctly.
Bad Habit 3: 'Set it, and Forget it'
Oh, we wish making money in markets were easy. In the old days it was easy to buy and hold and leave all alone. That is how our parents and grandparents built wealth. But today if you forget what you have working you run the risk of ruin. Back in the day this was not the case, and we were told a rule by our elders to just buy companies and forget about looking/trading them for the next 30 plus years. That used to work, when the country was growing at a strong pace after World War II Well, I'm here to tell you the time has passed on that rule. Buy and hold can turn into hope and pray!
Don't believe me? Just ask anyone who held stocks through the financial crisis, and how stressed someone holding Bank of America stock was when it plummeted from 40 all the way to 3 bucks! Always understand what you own, how it can be affected by government policies and the economy. Awareness and perception are key to financial success - don't be complacent.
We'll cover a few more bad habits to break in a couple of weeks. Until then, if you need to make some changes in your style - do it!