7 Things You Should Know Before You Short a Stock
“As a very successful investor once said: “The bearish argument always sounds more intelligent.” -Peter Lynch, One up on Wall Street The stock market is the greatest wealth creation machine ever created. But every so often, you’re going to be tempted to bet against the market, or a particular stock or ETF. Maybe you see a technical pattern you don’t like. Maybe you see an economic downturn coming. Or maybe you think you’ve spotted an outright scam. But shorting is not as simple as you think. Shorting requires an intimate understanding of market mechanics, and the harsh reality that stocks sometimes go up for no good reason. So let’s go through 7 things you absolutely need to know before shorting a stock or ETF. 1) Understand What Shorting Really Is Shorting stock isn’t quite as simple as buying it. Shorting requires borrowing shares from another investor. Your brokerage firm facilitates this process for you. Then, you sell those shares in the hope that they’ll fall in price. If it drops, you’ll buy the shares back (which is called ‘covering’ a short), capturing a profit. For example, if you sell Amazon.com (AMZN) at $1000 and buy it back at $950, you’ve earned a profit of $50 per share. 2) You Can’t Short Everything You Want Not every stock is available to be shorted because it can’t be borrowed. Typically, when a stock is widely disliked or is facing a scandal, it will be so heavily shorted that your broker simply won’t be able to locate shares for you to short. Every brokerage platform has some mechanism for indicating that a stock is hard to borrow, or not available to borrow at all. For examples, as of June 12, 2017, shares of the troubled radio company Cumulus Media (CMLS) can’t be borrowed. With the company rumored to be on the brink of collapse, it’s already attracted plenty of shorts. So there are no shares left for new potential shorts to borrow. 3) Know Your Expenses and Margin Requirements If you want to short stocks, you are required to have a margin account. And you must have enough capital in your account to back up your short positions. For example, if you want to short $10,000 worth of stock, you may be required to have $5,000 of cash in your account. Plus, shorting isn’t free. To short a stock, you have to pay your broker a “stock loan fee.” And the more volatile a stock is, and the more difficult the shares are to borrow, the higher that fee is. Check with your broker for exact terms. 4) Realize That the Interesting Bear Argument Always Sounds Better Most investors want the stock market to go up. But many traders are attracted to contrarianism, and the often-sexy arguments of bears. For example, for years many bears have used obscure financial metrics like the Schiller PE (CAPE) Ratio, market cap to GDP ratio, and NYSE Short Interest to imply that the SPX is overvalued. These arguments always sound a lot more clever than the typical bull rationale, which revolves around plain old earnings and economic growth. And yet, the market’s done nothing but gone up: So think twice before buying into doomsday scenarios, no matter how attractive they sound. 5) Don’t Short Momentum Stocks on Valuation Never short a stock simply because it’s trading at 50 times earnings. You know why? Because it might be worth 60 or 70 times earnings a week from now. Momentum stocks have a tendency to go way farther than may seem reasonable, especially if they are reporting strong earnings. We suggest watching Scott Redler’s recent video lesson Facebook (FB) so you can see how a stock with consistently strong earnings can destroy the bears: And look at momenutm favortie Salesforce.com (CRM). It’s regularly been called overvalued throughout this bull market: Now look at this chart: The bears — as smart as they may be — have been wrong. Why? Because traders love to buy momentum stocks with strong earnings. 6) Your Timing Must Be Impeccable If you want to short a hot stock or the market as a whole, you need great timing. Being right doesn’t matter if you’re not right at the wrong time. For example, many experts correctly called the housing bubble and subsequent collapse of the financial system very early. We’re talking 2004 or 2005. But bank stocks didn’t peak until December 2006. And in the last 5 years, how many times have you heard that there’s a bond bubble?: The bond bubble people may be right… but the TLT chart hasn’t really broken yet, has it?: 7) You Are Betting Against Gravity The S&P 500 has returned an average of 11.4% since 1928, according to NYU Professor Aswath Damodaran. And when it’s rising, even the worst stocks can go up. So you are betting against the market’s reverse gravitational pull towards the sky. We’re not saying you can’t make money shorting. Just be careful!
Continue Reading -->Weekly Sentiment Report: With Record Highs All Around, Are the Bulls Out of Control?
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we definitely saw a bull party starting, with the VIX dropping back towards the 9.56 generational low set from May 9. And after I wrote that, the VIX made an even lower low at 9.37 while the SPX, Nasdaq, Russell, and Dow all hit record highs. The VIX hasn’t been so low since December 1993. While I always love talking sentiment, this latest market pop makes now the perfect time for an update on the market’s mood, especially since we justed passed this week’s big news trifecta — Comey’s testimony, the UK election, and the ECB Meeting. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish Obviously, the VIX is pretty much as low as it gets. The 3-month curve is at +4.93, which means traders are extremely bullish. Readings near 5 are most definitely in froth territory. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 59, up from 56 last week. F&G operates on a 1-100 scale, and a reading of 59 is neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.4% of individual investors are bullish, up from 32.9% last week. This 32.9% reading is below the 38.5% long-term average, and indicates that individual investors are basically neutral. The 8-week moving average for bullishness is just 31.7%. At the start of the year, that 8-week moving average was 45.6%. So even though the markets have been going straight up, individual investors have grown less and less trusting. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.55 yesterday with a 3-day moving average of 0.57. These numbers are under historical norms, indicating that traders are heavily leaning towards call options. This indicates high bullishness. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 77 this morning (77 calls bought for every 100 puts). The 10 day moving average is 83.7. The ISE has been steadily declining for the past couple of weeks — a bit of a surprise given the market’s stability. Conclusion Out of 5 sentiment indicators, we have: 2 bullish 2 neutral 1 bearish These numbers are unchanged from last week. However, we are definitely approaching frothy territory, based upon the huge collapse in the VIX and the drop in the CBOE equity put-call ratio. The doomsday crowd has been consistently saying the crowd is too bullish — even though they never have numbers to back those views up. That said, they’re close to being right. The AAII sentiment number indicates that individual investors haven’t quite bought into the bull case, even though volatility has disappeared as the market keeps grinding up. Next, I want to repeat some data I posted last week: A recent Gallup poll showed that just 54% of US adults have participated in the 2009-2017 bull market. From 2001 – 2008, 62% of adults owned stocks. Before the financial crisis, as many as 65% adults owned stock. That means a huge number of people have missed out on a 267% move in the stock market. On Thursday, Scott Redler talked about the biggest risk of all — the risk of missing out on wealth creation via smart long-term investing. And it’s crazy that even now, with the market more than tripling and going straight up since the election, there are still a lot of folks that don’t believe. Scott set a target of 2470 by June 30, and that scenario looks more and more likely. Now if that AAII sentiment number was at 45%, I’d probably be looking at SPY puts or VIX calls. But for now, it looks like the bulls still have the ball.
Continue Reading -->T3 Live Coming Events | June 2017
Boca Raton, Florida | Saturday June 10 | FREE Stock Trading Seminar RESERVE YOUR SEMINAR SEAT >> Join T3 Live for a special 4 hour training event for stock traders. | 1-888-998-3548 View the Agenda | Register Today == > Veteran trader Joseph Conti is one of the original SOES Bandits. One of the earliest NASDAQ traders capitalizing on the small order execution system and routinely traded millions of shares per day. Joseph also managed over 500 proprietary traders from the mid 1990’s through the mid 2000’s. He has witnessed the highs and lows of trading for more than 2 decades, his stories and insights will surely shorten your learning curve. Former floor trader in Chicago, Rob Smith has dedicated his life to mastering a quantified edge. Sounds fancy, but it means you never make a decision without a good reason. A repeatable reason. Defining your edge is where consistency is borne. Plan to be blown away by Rob’s Quant Edge presentation. Reserve Your Spot == > Here is your Itinerary: Saturday June 10, 2017 9am-1pm RENAISSANCE BOCA RATON HOTEL 2000 NW 19th St, Boca Raton, FL 33431 RESERVE YOUR SEMINAR SEAT >> Traders Digest: The 10 Stories We’re Reading Right NowFrom the Desk of Micheal Comeau… Wonder what traders are talking about today? We’re here with the top 10 stories we’re sharing with colleagues today, covering topics like:Why traders are betting big on the QQQ ETFTuesday’s mega-rally in gold, which could be a sign of things to comeThe mysterious world of bitcoin and other cryptocurrenciesAnd more! So check out these links right now and get up to speed: Get All 10 Posts From this Week’s Trader’s Digest Here == >Omega Prop Training | June 24-June 27 | Info 1-888-998-3548 Redler Ultimate Access | Only 20 Spots | NYC October 2017 LEARN MORE ABOUT TRAINING WITH SCOTT >> Jeff Cooper: Why the Gold Explosion May Boom BIggerThe precious metals miners were the big story on Tuesday. And I think it’s the beginning of a bigger move. The upthrust didn’t take us by surprise since the Daily Market Report has been positioned long in GDXJ, FNV and PAAS for the past week. What was surprising was the persistent trend day that wouldn’t pull back to allow players on. For the last week, I’ve been getting a lot of emails and Tweets asking how I could be bullish on the miners when they were lagging gold itself. My answer was that there may have been some month-end cross currents dragging the miners down. Continue Reading == > Trader Training…Quant Edge 4 – Week Coaching Program with Rob Smith | Begins July 10, 2017 Learn More == > Options Training With Doug Robertson | Listen to the Podcast == > Forex Training with Kurt Capra | How to bounce back from adversity == > New Training from Jeff Cooper | How to Combine Technical Signals for Maximum Profits == > How to Trade the News With Mark Melnick | Download the Case Study == >
Continue Reading -->Trader’s Digest: The 10 Stories We’re Reading Right Now
Wonder what traders are talking about today? We’re here with the top 10 stories we’re sharing with colleagues today, covering topics like:Why traders are betting big on the QQQ ETFTuesday’s mega-rally in gold, which could be a sign of things to comeThe mysterious world of bitcoin and other cryptocurrenciesAnd more! So check out these links right now and get up to speed: 1) ETF Buyers Have a New Go-To Fund for Chasing the Tech Rally (Bloomberg) After a stellar run in tech stocks this year, some ETF investors are cashing in their chips. Others are trying their luck with a new hand. Read the Story ==> 2) Jeff Cooper: Why the Gold Explosion May Boom Bigger (T3 Live) The precious metals miners were the big story on Tuesday. And I think it’s the beginning of a bigger move. Read the Story ==> 3) Santander Rescues Troubled Rival in Test of Europe’s New Rules (NY Times) After the global financial crisis, Europe built a system designed to contain the collateral damage from failing banks. That new system appeared to pass its first test on Wednesday, as authorities efficiently dispatched a troubled Spanish lender. Continued Reading ==> 4) The Quiet Master of Cryptocurrency — Nick Szabo (The Tim Ferris Show) Nick Szabo is a polymath. The breadth and depth of his interests and knowledge are truly astounding. He’s a computer scientist, legal scholar, and cryptographer best known for his pioneering research in digital contracts and cryptocurrency. Continued Reading ==> 5) Tesla gives a shadowy tease of the Model Y crossover SUV (Engadget) It’ll take a few more years before Tesla officially launches the Model Y, but we now kinda, sorta know what it could look like. Continue Reading ==> 6) SEC Takes More Time to Mull Chicago Stock Exchange’s China Deal (NY Times) The U.S. Securities and Exchange Commission will take up to another 60 days to decide whether to allow the sale of the Chicago Stock Exchange to a group of investors led by China-based Chongqing Casin Enterprise Group. Continue Reading ==> 7) Rob Smith: Why Does VXX Always Go Down? If you’re in the market these days, you know that everyone’s talking about the incredibly weak VIX. And while the VIX remains near all-time lows, interest in trading the VIX ETN’s (exchange traded notes) — especially VXX, UVXY, and TVIX — is at an all-time high! Continue Reading ==> 8) Theresa May’s Incredible Shrinking Poll Numbers (The Atlantic) As early as January, the Economist had dubbed her “Theresa Maybe” for her lack of any clear strategy on Brexit and habit for backing off key promises, not least the election itself. But this was more than just a nickname now. Her ineptitude had become the main event. Continue Reading ==> 9) James Comey testifies before Congress: 5 things to watch (CBS News) James Comey is set to testify publicly before Congress for the first time on Thursday since President Trump fired him as FBI director last month. Comey’s appearance has been highly anticipated as countless bombshells involving the lead-up to and aftermath of his termination have leaked in the news media over the last month. Continue Reading ==> 10) Retailers might turn parking lot dead space into biz opportunity (NY Post) Faced with shrinking sales, mall operators, big box stores — like Target, Lowe’s, Home Depot, Macy’s and JCPenney — and other anchor tenants have started to reimagine their acres of unused parking lots as redevelopment opportunities that could create new revenue streams, The Post has learned. Continue Reading ==>
Continue Reading -->5 Fast Facts About the Boring S&P 500
2017’s been a nutty year. It’s been a remarkably sleepy year, with the S&P 500 grinding up at a snail’s pace despite growing geopolitical tensions, stretched valuations, and an endless flurry of headlines out of Washington courtsey of President Trump. So I dumped 9,438 trading days worth of data — going back to January 3, 1980 — to give you a numbers-based breakdown of just how weird 2017 is. 1) 1% Days The S&P 500 has moved 1% or more in a day only 4 times in 2017. In 2016, we had 4 daily 1% moves by January 8! And before 2017, the market had 1% daily moves on average 63 times a year! 2) Up Days and Down Days In 2017, 54.7% of all trading days have been up days. While it’s felt like the market only goes up a little bit every day, this is only slightly above the pre-2017 average of 53.1%. 3) Intraday Volatility I calculate a day’s trading range with the following formula: High minus low, divided by the prior day’s close. So if the S&P had a 20-point difference between its high and low, and the prior day’s close was 2000, the range would be 1%. The average daily range in 2017 has been 0.6%. This is less than half the pre-2017 average of 1.3%. That means intraday movement is running at less than half the long-term average. 4) Average Daily Move On average, the S&P has moved only 0.3% per day in 2016. This is dramatically lower than the pre-2017 average of 0.8%. So if you’re falling asleep watching the major averages, you’re not alone. I write about the major averages every day, and my daily mission is now “find an interesting way to say nothing happened!” 5) Finishes Near the Highs of the Day For my final piece of analysis, I wanted to see if the S&P 500 has tended to finish closer to the highs of the day. So I looked for days where the S&P 500 finished in the top 1/3 of the daily range. (the high minus the low). We have had 106 trading days through Monday, and the S&P 500 finished in the top 1/3 of the range 54 times. That’s 51%. Pre-2017, the S&P finished in the top third of its range just 42% of the time. ******** The takeaways are simple: 1) The S&P 500 is not moving intraday 2) The S&P 500 is not moving day-to-day 3) Judging by the trend for us to finish near the highs, it doesn’t seem to pay to short the market intraday. 4) If you’re looking for action, focus on hot momentum stocks… not the indices and related ETF’s!
Continue Reading -->The Sub-10 VIX Is About to Set a Crazy Record
Min Zeng of the Wall Street Journal just Tweeted a very interesting stat about the VIX: $VIX at 9.75, on pace to close under 10 for the seventh time this year–the most ever. I double-checked the data and indeed, Zeng is correct. But taking a deeper look at the data (my data set goes back to 1990), things get even more bizarre. All 6 of 2017’s sub-10 closes in the VIX happened on May 8 or later. (remember, today’s would make lucky number 7) And if get another sub-10 close, that would mark 5 in the past 7 sessions. Since 1990, the VIX has NEVER closed below 10 in 5 out of 7 sessions. So it’s on the verge of a truly incredible record. Already, the VIX has finished under 10 in 4 of the last 6 sessions. This has only happened 3 other times since 1990. Those 3 other occurences were on 12/28, 12/29, and 12/30 in 1993, during a streak when the VIX had 4 straight closes below 10. So the post-election collapse in volatility truly is remarkable. Now let’s take things a step further. Prior to May 8, 2017, there were only 9 sub-10 closes in the VIX. That’s right. Just 9 out of 6,891 trading days — or 0.13% of the time. And now we’re going on 5 in just 7 days — or 71%! This looks insane, but let me explain why it’s perfectly logical. The VIX represents expected volatility. And when actual market volatility goes to near-zero — as it has since President Trump’s victory — the VIX follows. Therefore, the VIX’ behavior is entirely logical. Anecdotally, I’ve been hearing a lot of traders chat up long positions in VIX-related instruments like VIX calls or VXX calls, or plain old SPY/SPX options. I’ll just leave you with one of the great all-time market one-liners: “The market can stay irrational longer than you can stay solvent.” -John Maynard Keynes 2017 has been BRUTAL to traders betting on a rebound in volatility. You can know why it should happen, but you had better know when, or else you’ll be eaten alive by time decay, one penny at a time. So if you’re going to put your chips down… be very careful.
Continue Reading -->Weekly Sentiment Update: The F.O.M.O. Train Is Unstoppable… for Now
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, we saw traders show less more fear after the SPX broke to new all-time highs. And the question I asked was whether we were set for a F.O.M.O.-driven ride up to SPX 2500. With markets still clawing higher, it looks like the answer is yes. So let’s take a fresh look at our 5 primary sentiment indicators to see if the ride towards 2500 has made the bulls overconfident. (click here for a primer on them) 1) VIX Spread – Bullish The VIX dropped as low as 9.65 Friday, putting it within range of the the 9.56 generational low on May 9. A couple of weeks ago, the VIX curve nearly inverted, but the 3-month curve is at +3.7, indicating traders are not pricing in much near-term volatility. Or in plain English, folks are bullish. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 59, up from 56 last week. F&G operates on a 1-100 scale, and a reading of 59 is pretty much neutral. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 26.9% of individual investors are bullish. This 26.9% reading is well below the 38.5% long-term average, and implies that individual investors do not trust this bull move. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.66 yesterday with a 3-day moving average of 0.66. This is above historical averages. 5) ISE Sentiment – Neutral The ISE Sentiment Index was at 84 Friday afternoon (84 calls bought for every 100 puts). The 10 day moving average is 89.3. These numbers show higher put demand, but they’re actually in-line with recent averages, so I’ll also lump it in as neutral again. Conclusion Out of 5 sentiment indicators, we have: 2 bullish 2 neutral 1 bearish So these numbers are unchanged from last week. The question to ask is whether we’re on the verge of outright forth. Last week, I said no. This week… I’m saying maybe. The AAII Sentiment Survey indicates that individual investors are pretty skittish. Typically, at tops, you see the masses wanting to get in. One possibility is that the tense geopolitical climate is preventing investors from getting too bullish, even though volatility has gone to basically nothing since the election. And the CBOE equity-put call doesn’t show rampant demand for call options, another thing we typically see at market tops. Therefore, I think there’s a reasonable chance we charge past SPX 2500 in the next couple of weeks as shorts throw the towel in, unable to withstand the bulls’ painfully slow push higher. And at that point, perhaps crossing a major round number like 2500 really gets the bulls overconfident, setting the stage for a drop. But for now, let the relentless post-election bid teach you an important lesson: the trend is your friend. And it can be your friend for a lot longer than may seem reasonable. So if you want to bet against it, have a really good reason. I’ll end with a tip: if you’re reason is “what goes up must come down,” go back to the drawing board!
Continue Reading -->What You Don’t Know About Prop Trading… but Should
In this special extended webinar, Amber Capra breaks down everything you need to know about the exciting world of prop trading: Amber covers the world of prop trading from A to Z, including:How to determine whether prop trading is right for youWhy you need training, community, and ongoing coaching to succeedHow you can qualify for 100% tuition reimbursement in our prop programThe different licensing requirements for US and non-US tradersDetails about different trading platforms, including Fusion and LightspeedHow profit splits workHow much capital you need to get started as a prop traderRisk management techniquesWhy you need a ‘Forced Discipline’ risk management programWhether or not you can prop trade on a part-time basisTips for avoiding pitfalls that can hurt your trading careerHave a question about prop trading? Call 1-888-998-3548 or email us at info@t3live.com Learn About Our Omega Prop Program
Continue Reading -->Why You Need a Trading Checklist
Checklists can save your life. Literally. Anesthesiologist Peter Provonost studied how 100 Michigan hospitals inserted central lines (also known as intravenous tubing) into patients’ chests. . Central lines deliver lifesaving medications, and proper installation is critical for avoiding life-threatening infections. 30% of the time, surgical teams skipped 1 of 5 essential steps in the process. But by using a simple checklist, the infection went from 4% to zero, saving 1,500 lives and nearly $200 million. That’s not all. Checklists keep planes in the air. Checklists keep nuclear power plants operating safely. And checklists can keep traders like you avoid simple errors that can cost you money. Here’s a simple checklist you can use to avoid errors when they’re most likely — the order entry process. Before we get to the checklist, make sure your trading platform is set up in a way that works for you. For example, many trading platforms let you set defaults for trade parameters including share size. You can also often set little things like how your mouse interacts with the platform. Depending on your settings, you could even place orders with a single mouse click. And set your chart time frames in a way that corresponds to your actual trading. Since all platforms allow you to save your screen layouts, keep yours saved so you can always go back to square one. So take a half hour and go through your platform’s default settings. This will reduce the risk of placing accidental orders, or of accidentally looking at the wrong charts. Now let’s take a look at an actual order entry checklist that can prevent you from making errors: Step 1: Ask Yourself If You Have a Good Reason for Making This Trade Since they’re constantly bombarded with news, data, and ideas, traders are always tempted to act impulsively. You can counteract this tendency by asking yourself: do I have a good reason for doing what I’m about to do? Often, that will be enough to stop you from getting in bad trades. Step 2: Form an Entry and Exit Plan If you’ve got a good reason to make a trade, now it’s time to decide on an entry and exit plan. Know where you want to get in, and where you want to get out. You should have a stop loss to minimize downside risk, and a target price that gives you room to make a solid profit. This will prevent you from getting in a trade, and then asking “so what do I do now?” Step 3: Double Check Your Ticker There are two types of “fat finger” trades. That’s what happens when a trader hits the wrong keys on the keyboard, and a whole lot of money ends up in the wrong place. In 2015, Deutsche Bank’s foreign exchange desk accidentally sent a hedge fund $6 billion because of a simple typo. If you’re not watching carefully, you could very easily buy Advance Auto Parts (AAP) instead of Apple (AAPL). You could mix up Agilent (A) and Alcoa (AA). Or Dominion Energy (D) and Dupont (DD). Step 3: Double Check Your Share Size Let’s say you want to buy 100 shares of JP Morgan (JPM) at $80. That’s $8,000 — a decent chunk of change. But what if you accidentally pop in another zero, and buy 1000 shares? Well, you just made an $80,000 trade. That’s an an extra $72,000. And if the stock suddenly drops $2, you’re down $2,000. Had you bought just the 100 shares you wanted, you’d only be down $200! Step 4: Double-Check Your Expirations and Strike Prices on Options and Futures If you’re trading any instrument with an expiration date, like options or futures, you must absolutely double-check the expiration dates of what you’re trading. You’re often looking at dozens or even hundreds of small numbers on a single computer screen, and it’s easy to make mistakes. Make sure you select the right the expirations and strike prices. This is especially important if you’re entering an order with multiple legs. You may fool yourself into thinking you’ve found an especially attractive calendar or butterfly spread, when in fact, you just got ripped off! Step 5: Perform a Post-Mortem Analysis of Your Best and Worst Trades We recommend that traders keep a diary of their trading activities so they can accurately track their trading history. We’ve found that this piece of advice is mostly ignored. If you’re not willing to take this step, at the very least, do after-the-trade breakdowns of your best and worst trades. Was your rationale for the trade correct? Did you get lucky? What could you have done better? How did you know when to get out? Be honest with yourself, and you’ll start to understand your true trading nature.
Continue Reading -->The 7 Deadly Sins of Trading, and How You Can Cure Them
Greed, for the lack of a better word, is good. That’s what Gordon Gekko said in the classic 1987 film Wall Street. And indeed, a little greed goes a long way. Greed can push you to work harder to bring home a bigger paycheck. It can push you to save more money for retirement. But greed can also eat you alive… even if you have all the money in the world. Greed is only one of the 7 deadly sins you’ve heard about from religious texts or pop culture. And as you’re about to learn, they all apply to trading, and they all have cures if you understand them. Lust is often associated with sexuality. But there’s another kind… the lust for money and power at all costs. That’s a recipe for disaster for 2 simple reasons. An obsession with making more money can push you to take bigger and bigger risks. You’ll put yourself in harm’s way when there’s no good reason to. It can also push you to cross ethical and moral boundaries. Remember, once you cross that line, there’s no turning back. The Cure for Lust Replace your desire for money with a desire to learn. As you become a more skilled and experienced trader, you’ll likely earn more money. So focus on building your skills and gaining experience, NOT the potential rewards of skills and experience. It’s like dreaming about buying a Ferrari before you’ve even had a job. It’s downright childish. Grow up, get good, and the rewards will come. 44% of lottery winners go broke, according to a 2015 study by the Camelot Group. Why? Because most people can’t handle sudden wealth. Traders are no different. Once a trader achieves financial success, he’ll be tempted to overindulge in everything from food to clothes to travel to cars to real estate. An upgraded lifestyle means upgraded living expenses So what happens when that trader has a bad month or bad year? Panic, frustration, and inaction. When the mortgage is due today and there’s just $28.71 in the checking account, it’s pretty dang hard to focus on the charts. The Cure for Gluttony As you earn more money, save a higher percentage of what you take home.. Let’s say that after a year of trading, you have $25,000 left over when all your taxes, trading expenses, and bills are paid. And let’s assume you feel comfortable spending $7,500 of that on “fun stuff” like new clothes, travel and entertainment. That’s 30%. On your next $25,000, take it down to 25%. And the $25,000 after that, reduce it down to 20%. The exact numbers don’t matter. The point is, by scaling down your spending, you’ll keep a safety net in place for the rough times. It’s okay to want a bigger house, a nicer car, and private school for your kids. And it’s okay to dream about having $10 million in your bank account. But if you’re trading just to make money to buy more stuff… go do something else. To become a great trader, you must love the process of trading. It’s not easy to stare at computer screens for 9+ hours a day, trying to make sense of news and charts and price action. Most people burn out from it. But the best of the best can’t pull themselves away! The Cure for Greed Revisit what you really love about trading. Is it the process of scanning through 200 charts to find the one that speaks to you? Is it the rush of adrenaline you get when you nail a trade? Or is it just plain fun? Your trading results are important. If they’re not, you shouldn’t be in this business. But it’s equally important to enjoy the process. So shift your greed for money to a greed for sheer enjoyment. Experienced traders often get nostalgic for the ‘good old days’ before high frequency trading, decimalization, and overactive central banks. Many of these traders run into trouble because they do more complaining than learning. Instead of learning new skills, they get left behind. Evolution is a cruel beast. And it comes for the weakest traders first, the ones that don’t adapt. It’s 2017. The strategies you use today may not work 3 years from now. What are you gonna do about that today? The Cure for Sloth Put yourself on a regular schedule for continuing education and personal development. Don’t give yourself the option of NOT improving. You could set a goal of reading 2 new books a month. Or learning 4 new chart patterns. Or writing out 3 case studies about your best — or worst — trades of the month. The possibilities are endless. And don’t forget about improving your non-trading self. Some of the biggest trading lessons are learned away from the desk on a racquetball court… or on a wild boar hunt in Texas. (seriously) An angry trader is one that just lost money, and is on the verge of losing more. If you’re angry, you’re impatient. If you’re impatient, you’ll make more bad trades. And if you make more bad trades, you’ll get even angrier. That’s when the ‘revenge trading’ starts. That’s when you lose $2,000 in the morning, and you’re determined to ‘make it up’ with more trading. Before you know it, you’re down $5,000. And then $10,000. And so on. And so on. The Cure for Wrath Clean up your mess as best you can. And then walk away from your trading workstation. Don’t come trade again until you have your anger out of your system. Talk to your buddies, watch a funny movie, or take a walk. But get it out of your system. And if you feel like you’re getting out of control too often, seek professional help. Anger won’t just hurt your bottom line. It will also destroy your body. On Wall Street, you can make $1 million a year and still feel poor. Why? Because the guy next to you made $2 million! Traders are competitive by nature. It’s no wonder so many love
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