The Insightful Trader

Familiarity Can be Hazardous to Your Trading

by on Oct.27, 2009, under Education

Those of us in the investment world, even if you’re relatively new, have always been taught that you should have a thorough knowledge of any investment you make. Though this may be true of any investments that you plan to hold for any amount of time, for short term traders I ‘d like to put forth the proposition that this may be hazardous to your short term fiscal health.

As a trading coach and a long time trader I’ve seen it many times, heck I’ve even done it myself, where your familiarity with a given stock or group of stocks leads to poor trade management. Whereas if you just happen upon a trade or a stock that perhaps someone else mentioned, then you’re much more likely to follow your signals and maintain your stops without any preconceived notion or expectations of the outcome. If the trade works, fine, if it doesn’t then that’s ok too. You followed your rules.

This first came to my attention several years ago when I started noticing certain traders who regularly traded the same given group of stocks would tend to be more lax and give a given stock more leeway or have higher expectations of the results than the trade setup suggested. Say for example Trader A likes to trade the oil stocks and he just knows oil is going up, thereby his stock should be up that day too irregardless that it’s beenup 5 days in a row, is right at a major resistance point etc. you get the picture. If you had never traded that stock in your life or could care less about the price of oil, then your expectations of a given outcome are going to be completely different and probably more objective than trader As.

I recently made the same mistake when the financials had all made a 200% move thinking there was no way they could continue. What started out as what I felt was a fairly conservative contra play using an inverse ETF and options, relatively quickly went from being a  short swing trade into a long term holding. Conviction in the market can be a killer if you’re not careful.

We all hear it and say the words, but as we all know the psychological part of trading is often more important than the actual skill set in many cases. Just remember to set up your trade parameters for whatever time frame and be adamant about following,  BEFORE you make  the trade and especially so if it’s one of your favorites.

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