Be forewarned…this article is not going to be about technicals. As a professional trader sometimes story-telling is the best way to understand someone else’s trade or get in your own (as elaborated on in my last post on “Engineering a Trade“). So why did BTC/USD have that huge spike to 19,000 and that huge correction back down? What’s happening with BitCoin?
I’ve been missing for a while from the blog; for that, I must apologize. For those of you on my unusual options alert service, we’ve been doing quite well I’d say.
But that’s beside the point. Tonight in my chat room I was reminded of a fun story that exemplifies what I’d call ‘designing’ a trade (or even engineering a trade).
Engineering a Trade
Last October, a good friend of mine was going for an interview to go work at a hedge fund. He wasn’t sure what to say at his interview so he straight up asked me if I had any advice.
Luckily for him, I was in the middle of engineering a trade that would shit a decent amount of my asset allocations towards a sector and out of a few currency trades. Talking about a prior trade prospect after it has come to fruition might seem like bragging.
Market psychology is a cornerstone of how markets operate. Whether that’s psychology that the ‘big money’ has trained retail to follow or whether it is the psychology of traders themselves. Options expiration dates are a great way to show what I mean.
Trading is a lot like gambling; I’ve already gone over the differences of investing vs. trading in previous blog posts, and it’s a subject I’m very likely to touch on again. It’s very important.
August 18th, this past Friday, was the standard expiration for August monthly options. While many people were still holding onto options expiring that day (something you should NOT be doing because of the impact of the options greek ‘theta‘ as the primary reason), there was some hope that the markets would rally and those option holders might be able to regain some of the profits they had made. That or they were hoping their losing positions would gain in value.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us….”
– Dickens, “A Tale of Two Cities.”
Most people are lured into financial markets because they see them as a viable way to get rich quick. The luxuries and excesses enjoyed by many of Wall Street’s elite seem so easy to attain. I mean you’re undoubtedly smarter than investor John Doe…and look at him! He’s loaded from his investment career!
Technically speaking, sure…it’s possible. I’ve had option trades with +2000% returns. While sharing these trades has drawn me many social media followers, at the risk of losing them all…that’s not how this ‘game’ works.
I’m very content that I was an investor before I became a trader. There is a massive difference. I partake in both, and I recommend anyone looking to make money in the stock market do the same. That’s why I wanted to start this blog with this post differentiating investing and trading.
Investing vs Trading
Investing is the preservation side…and it’s the harder side to sell people on when they see what the trading side can do for expanding your portfolio. The issue is that the trading side can (almost always) burn you much faster than the investing side can.
An investment, to me, is money that is put away that you don’t check on. It’s buying equity in unshakeable companies, and ideally, most of them being ones that pay dividends. The “Dividend Aristocrats” are a good place to go finding names like these…but I’m talking about the $XOM, $WMT, $JNJ and other names in the list. Or even off the list, companies like $AAPL and $JPM. In summation, “too big to fail” sort of names.
A trade is more of a bet. It’s a prediction of the movement of a stock and holding onto that exposure (be it an equity day-trade or any options trade) for as much juice you can squeeze from it if you were right…or cutting your losses when you weren’t.
What’s my point? Most of my posts are going to be about trading around short-term trends. But I trade with far less money allocated to trading than I have just sitting in an account with those Dividend Aristocrats. I will post about some long-term strategies along the way, but consider this a warning of the danger of solely or mostly trading rather than investing. Only seasoned traders can be consistently profitable…and even then, they’re not always right.
Another part of what I tell everyone I’ve advised professionally as well as personally….
Only trade money you can (literally) take right now and burn without it affecting your livelihood. And stay out of the margin. I’ve seen margin calls end lives, not just rip away people’s money.
With that said, the fun stuff shall commence soon. Please feel free to ask any questions you may have as I go along with the blog; they lead to great posts and I love teaching.