Once routines become instinct, bad trading habits become tough to break. Let’s crack open the egg here and look at three habits we can change to help us become better traders and investors.
1: Averaging down on an investment
We are told to “buy the dips,” and from an investment standpoint, that is sage advice. But for traders – especially options traders – that can be terrifying. This is why it’s important to 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. Make it a point to recognize when momentum takes hold, and remember that markets are a bidding machine. They are more like Ebay (an auction) than Walmart (where prices are always falling). Stocks have value, and they will go to the highest bidder (if there is one).
2: Going “all in”
We talk about this one often in our chat room; it is one of the worst bad trading habits out there. Putting all of your eggs in one basket is not just impractical, it’s also just plain stupid. (Some traders have their own definition of what “all in” means, but for our purposes, it means investing all of your cash in one position.) When you don’t have any cash available for new opportunities, you’ll be stuck when new trade ideas come across your screen.
Plus, 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), the stock market is a dynamic vehicle and any whiff of bad news will leave nothing but sellers to deliver pain to buyer and holders. Always have cash at the ready, which means always sizing your trades correctly.
3: Buy and hold
I wish making money in markets was easy. In the old days, you could buy and hold, which is how our parents and grandparents built wealth. But today if you forget what trades you have working, you run the risk of ruin.
Don’t believe me? Just ask anyone who held stocks through the financial crisis in 2008. If you were holding Bank of America stock, you watched it plummet from $40 to $3. Ouch.
Always keep tabs on what you own, and pay attention to how it can be affected by government policies and the economy. Awareness and perception are keys to financial success. Don’t be complacent.
We’ll cover a few more bad trading habits to break in a couple of weeks. Until then, if you need to make some changes in your style – do it!
Copyright: imtmphoto / 123RF Stock Photo