The Covid-19 virus has shocked people’s lives and economies around the world. Many people have lost their jobs, businesses have shut, and medical systems struggle to name a few consequences. Investors are wondering where the opportunities will be and are seeking alternatives. We are seeing everyone adopting to a work-from-home lifestyle. There are advertisements on business opportunities that people can start while in quarantine. For those “Do-it-Yourself” investors, there is great uncertainty on how to trade these volatile markets. As anyone would expect, there are many trading systems for sale, yet they are rarely sold with the caveat “no one should try this at home”.
This year will have a special place in history. Social distancing and quarantine have impacted people around the globe as no other crisis has in past decades. This crisis has made us “unite” in fighting the pandemic by social distancing. It has left countless unproductive, jobless and has deeply impacted various industries. As a result, people are looking for alternative income sources.
All this coincides with a big change in the industry — zero commission trading. It has become common to see advertisements about the newest and best trading platform, to receive invitations from “pro” traders to join their trading programs, and to see the latest forex trading solution to become financially independent on the various social media platforms. Some of these advertisements, with the promise of quick and easy extra income, seem like the best bargain for anyone looking to start investing. Even though, the possibility of making profits by participating in the financial markets is a secret to none, it comes with a level of risk that is easily overlooked.
In an article from my colleague Jeff Miller’s Dash of Insight: “Intuition or Intu wishing?” Todd discussed how no investor has a crystal ball and the importance on creating an investment process that suits our personality. This realization comes with vital importance, as many investors fail to understand the psychological burden that comes with trading. We can run countless stock market simulations, watch videos, and practice trading with fake money, but only when real money is on the table, do real emotions arise.
The fear of loss or the want for more can break down any trader in just a few trades. Dr. Brett Steenbarger in his article “A Lesson in Trading Psychology” says:
“If your setups are valid, there are only two kinds of trades: Those that make you money and those that give you information.”
If the setups are valid… how could investors possibly know that? Do all investors have a set of rules they follow?
Human emotions play a big role in everyone’s trading life. Michael Covel has a full chapter on Human Behavior in his book “Trend Following”. Covel describes a few behaviors that will almost guarantee losses in trading the markets. One is greed:
“Traders try to pick tops or bottoms in hopes they’ll be able to “time” their trades to maximize their profits. A desire for quick profits can blind traders to the real hard work needed to win”
While models have a set of rules to enter and exit a given position, investors face countless challenges in the start of their trading journey. What to buy? How many shares to buy? When? How long to hold them? When to sell? They may enter positions based on what they heard from a co-worker and they may exit based on the latest tweet. While there is no single way to start or improve in trading, investors should always look to continue their education to develop their own set of rules. Having robust rules and process allows you to confidently invest/trade in uncertain times. Unprofitable trades are learning tools and profitable trades are a by-product of following your discipline.