Wednesday, August 8, 2012

4 Trading Strategies You will Enjoy!


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Many successful professionals are bad traders. While not everybody is cut out for trading, just like not everybody can be a lawyer or an engineer, there are certain traits that, while giving you advantage in your chosen profession, will hurt you in stock trading.

Engineers are often poor traders. Why? They want to measure and understand everything in precise terms. But stock trading is not a science; it does not lend itself to precise measurements. Trading is driven by human emotions. An engineer may develop a precise formula for valuing stocks or measuring charts only to see it shattered by market action because the market may view the exact same ratio, say p/e, as too high or too low, depending on the prevailing sentiment. As a result, engineers often argue with the market for no other reason than because their formula tells them a stock should be doing X while it is doing Y.

Academics

As they say on Wall Street, "don't confuse brains with a bull market." Knowing too much can be detrimental to your stock trading. The market can be irrational and illogical, and is certainly oblivious to your vast knowledge. Oftentimes, you have to act without complete information. While a superb intellect can help you understand what has happened, it may prevent you from acting while something is happening because you will either know better or have to understand first, before acting.

Corporate

Being good at team work and consensus building can also work against you in stock trading. Seeking consensus before buying a stock means polling as many "reliable" sources as possible to make sure that everyone is bullish: multiple five star ratings and strong buys, message boards and CNBC raving... You will definitely have a large "team" on your side but will be too late, buying at the top before a big drop.In stock trading people act first and talk second. Any opinion publicly expressed is already priced in and therefore worthless.

Being skilled at office politics can help you hide mistakes and shift responsibility but the blame game will get you nowhere in stock trading. Blame whomever you want as much as you want - Jim Cramer, your broker, the mysterious MMs - but at the end of the day what matters is your account balance.

This does not mean that if you are a successful engineer or scholar, you shouldn't invest. You just need to be aware that some of the qualities that make you successful in your profession can work against you in stock trading.



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