Friday, October 29, 2010

Some Reasons Not to Trade

Last weekend I wrote about some of the reasons why I trade and why others might also want to trade. This weekend I am going to explore some of the reasons on the flip side, discussing reasons not to trade. After all, there are usually a minimum of two sides to every story and before making an intelligent decision we might want to take a look at opposing points of view.

First and perhaps foremost it has often been said and written that most retail traders lose. A few years back, when studies of day traders were in vogue, that information became pretty compelling. Those daytrading brokerages filled with day traders at the computers have almost vanished and that is for a reason beyond the simple ability to trade from home. There simply are nowhere near as many day traders as there were in the roaring bull market of the late '90s coming into the 2000's. The clear fact is that it was a losing proposition for so many.

Risk, sometimes high risk, is a part of trading and that, alone, can be a reason for people not to trade. Whether it is perceived or actual, some folks just prefer to believe they are without risk placing their money in CDs or savings accounts. That used to be a belief about bonds as well until some bond holders (e.g. GM) learned that the safety was perceived only. Clearly there is risk in trading stock, options, futures, and/or forex and for that reason alone it is not for some. If the risk in your trades is keeping you awake at nights it seems to me that you either should refrain from trading or find some way to reduce the risk.

Reaction to risk, loss, and even gains can be quite emotional and reams have been written on the dangers of emotion to traders. I regularly see high emotion if I even dare suggest that politics might be involved in the trading equation and if that kind of emotion is raised over someone else's perceived beliefs, imagine how powerful it can be when a person's money is being lost or gained. Greed is powerful and it can and does have significant effects on people's trading. I have seen traders who were doing well get caught up in the emotions until they went "all in" on a single trade only to see their money evaporate. I also have seen traders so fearful that they held off and held off and held off entering what they believed to be a good trade as they awaited "confirmation" only to miss trade after trade or get in the trade only after the play had already run its course. Emotionalism can be a prime reason to avoid trading.

Another key reason not to trade is lack of knowledge. Trading is a business and it is a business that definitely is not for those who are unwilling to take the time to educate themselves. Some even refuse to undertake their trading education for reasons totally unrelated to trading and learning. Whatever their reason for refusing to educate themselves, be it lack of time, laziness, or pure stupidity, if they are unwilling to get the education, they have the perfect reason not to trade. Those who are uneducated going in are guaranteed an education but I can assure you that it will be a very costly education.

As part of the lack of education issue many are just too cheap to invest in their own learning. I often hear things like: "I can get all that for free on the internet." That probably is true but in my observations almost no one does it and some who try find that the reinvention of the wheel is extraordinarily time consuming and often the free education is much more expensive than the one that is purchased. I've had several coaching students come to me, for example, only after going the "free" route and losing very large amounts of money. Yes, there is a cost involved in education. However, many mentoring sessions and seminars that can be of great assistance cost less than the student might lose in a single trade. The education may well enable him to avoid that next loss or at least bring him to an understanding that can significantly reduce the loss.

In short there are many valid reasons not to trade. They might include lack of time, lack of interest, plain old laziness, emotionalism in the form of fear and greed, paranoia, ignorance, unwillingness to learn, or simple disinterest. I would urge the would-be trader to explore these reasons to avoid trading as well as the positive reasons to trade before making a decision whether or not to open his or her trading business. A trading business can be wonderful or it can be a nightmare. In either case, as is the situation in most of life, it is up to you.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved


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10 comments:

Anonymous said...

All those reasons refer to trading on your own. What about following a service, for example your service (or any other for that matter)?
If the service is any good, coupled with really basic money management, this way removes emotions, research time, sometimes even actual trading (like in brokers that support automated execution, no robots).
So you one can afford be lazy, uneducated etc. and nevertheless be consistently profitable. Or is it not true?

Grant said...

Bill, How do you define trading? I've been buying stocks for about 25 years. When my long term full service broker retired in 2007 I moved to TD Ameritrade. At least3 different times I got a 'Round trip" trade warning, for buyingand selling the same day. I think twice it was SDS, the ETF that is supposed to produce double the move of the S & P 500.
However, I stil consider myself an investor, not a trader. I think a trader plans to get in and out in a few days. I don't but some times I do.

My normal plan is buying stocks that pay dividends then writing covered calls on them.

Is that trading?

Grant Johnston, Chico, CA

Gary said...

At 60 years old, and a Budget officer of a corporation, not only do I find Stocks, and derivatives extremely interesting. I've read every book I can find on investing, I spend approximately 2 lunch hours per week at the library researching, and spent hundreds of dollars of charting. I've found a lot of advertising guaranteeing results, but not a lot of evidence of producing results. I'm sure there are some legitimate services out there, but I've looked relentlessly to find them. The same is true of training. I can tell you with complete confidence, for every honest trainer, there are 20 scams. I'm afraid I don't buy into the "get training and it will make a successful trader."

Anonymous said...

Bill,

First, thank you for what I believe are the the great insights and words of wisdom you continually provide. My comment has to do with a phenomenon that you often point out - the emotional aspect of trading. Do you 100% of the time follow your set plan (in/out of a position at a certain point) or do you hedge this by adjusting entry/exit points on the fly? Which method in your experience produces the best results?

Bill Kraft, MarketFN.com said...

Anonymous, the first and best reason to follow a service is not to indulge in laziness, but to assist oneself in learning how to trade. While following a service may be an easy way to go the trader learns nothing if they pay no attention to the how and why of trading. The trader will have differing goals, capital, risk tolerance, knowledge, etc. from the service provider and may not be in a position to make the trades at the same time as the service. In many cases he may still have decent results, but, in my view, would be much better off using the service for the purpose it is designed and that is to teach and illustrate methods and strategies of successful trading.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for writing, Grant. Trading is obviously a very broad term. I think of it in the broadest sense as almost anything other than pure buy and hold. I once read that the average investor only makes about 3 or 4 trades in a year and in general, I would not consider that trading. For me, trading involves strategies and methods that incorporate an exit strategy. In your case, for example, I would consider that you are trading since you are writing covered calls and do have a reason to exit certain positions. Writing covered calls, for example, has at least two exit strategies: assignment if the call is exercised, or expiration. As a trader, I have no plan as to the when of getting out other than the information the movement of the stock gives me. Some trades may open and close within a day or a week, while others may last for months, and some even well over a year. I suppose trading is a spectrum that runs from very active as in the case of a day trader to not so active as in your own example. For me, at least, all those fall into the very general category of trading.
Bill Kraft

Bill Kraft, MarketFN.com said...

While I agree with much of what you write, Gary, I don't agree that a would-be trader should go untrained. You, yourself, have spent a lot of time training yourself and should be applauded for that. If what you mean is that you don't want to use a coach or mentor because there are so many scammers out there, I can completely understand your position. There are some, however, who are excellent and can be a great help. It may involve some digging on the student's part to find the right coach, but it can definitely be well worth the effort and greatly reduce the time and effort otherwise spent in self-education. Asking for references and talking to them is one way. If the coach has a service as I do you can check the trade tables and see trades they are making and the results, both good and bad they are achieving. I, for example, give a guarantee that the student can have their money back if they are not completely satisfied with the training after the first two hours of a one day session. On the other hand, I have no problem with learning the way you are learning. I did much of that myself. I also attended seminars, however, and while some of them were a lot of puff and interested mostly in selling the next seminar, there was not one where I was unable to take away some useful information. I've always looked at it as a success if I could make more from what I learned from a coach or seminar than what I paid.
Bill Kraft

Bill Kraft, MarketFN.com said...

Anonymous, I have to say I sometimes do depart on the fly from my plan. Undoubtedly there is an emotional component when I do depart from the plan. Sometimes that has been successful but more often even when profitable, not so successful. I suspect the successes now are more the result of years of experience and literally thousands of trades. Overall I believe sticking to the plan works best over time. Of course, the plan is always a work in progress and is subject to change if and when flaws are discovered.
Bill Kraft

Anonymous said...

Bill,

Again an article to think about.
7 years already I am following the markets in US. In 2003 I spend 160 dollars to get an education for one day. The theory on that particullary
day was ok but it cost me 7 years to develop my tradingplan, and I think that's normal. It's like getting tennislessons. Everybody can learn the basics of tennis in one day...how to hit a forehand or volley...etc. But only a few can play the final in the usopen because they have the right attitude to train to achieve what they want. Trading = knowledge, training,persistence. And one day the tradingplan is working and emotions are gonne.

Ivo

Bill Kraft, MarketFN.com said...

Thanks for your contribution, Ivo. You really make a very important point about things all coming together at some point.
Bill Kraft