Trading Mistakes to Avoid – Overtrading

/by

Portfolio managers at institutions and hedge funds, for the most part, always need to be fully or close to fully invested. Retail traders don’t. You can stay in cash until you find the right trading opportunity that fits your criteria. As they say, “cash is a position.” But instead of waiting for A+ setups, many retail traders take B, C, and even D+ trades because they’re itching to trade.

This itch to trade often stems from the belief that being active in the market is the only way to make money. But in reality, overtrading is one of the quickest paths to blowing up an account. Every trade carries costs—commissions, spreads, slippage, and, most importantly, emotional energy. When you take low-quality setups, you’re not only unnecessarily risking capital but also draining yourself mentally, which can hurt your ability to execute when a true A+ setup appears.

If you’re constantly entering mediocre trades, your account will be weighed down by small losses or gains that don’t justify the risk. Worse yet, the frustration of losing on these subpar trades can push you into revenge trading, creating a vicious cycle that depletes both your focus and your bankroll.

Let’s say you’re watching a stock that’s stuck in a choppy range. You know there’s no clear trend, and the setup doesn’t meet your usual criteria. But after staring at the screen all day, you convince yourself, I just need to do something. So you take the trade. The stock whipsaws, hits your stop, and you take a small loss. Now, instead of walking away, you feel compelled to “make it back,” so you jump into another low-quality trade. Before you know it, you’ve racked up several losses on trades you had no business taking in the first place.

This is how overtrading turns a day of opportunity into a day of regret. It’s not just about the financial losses—though those can add up quickly—it’s about the mental toll. The more you overtrade, the harder it becomes to stay disciplined and wait for the right setups.

The best traders know that patience is one of the most valuable skills in trading. Cash is a position, and sometimes it’s the best one to hold. By staying out of the market when conditions aren’t right, you’re preserving both your capital and your mental clarity for when a high-probability setup finally appears.

Bottom Line

Instead of measuring your success by the number of trades you take, focus on the quality of your trades. Ask yourself: Does this trade meet my criteria? Am I taking it because it aligns with my strategy, or because I’m bored or frustrated? If the answer is the latter, step back and remind yourself that trading isn’t about constant action—it’s about consistent, calculated action. The right trade will come along, and if you execute it properly, it’ll make you far more money than a dozen low-quality setups you took out of boredom or impatience.

Trading Mistakes to Avoid – Looking Back

/by

The key to successful trading lies in sticking to your plan, not obsessing over every outcome. When you enter a trade, you’ve already evaluated the setup, assessed the risk, and made your decision. The market will do what it does, and once you’ve exited a position, the outcome is no longer within your control.

What is within your control is how you handle yourself before, during, and after a trade. If you follow your strategy and respect your risk management rules, there’s no need to second-guess yourself. It’s easy to get caught up in the “what ifs”—what if I stayed in the trade longer? What if I exited earlier? But these thoughts only create unnecessary stress and doubt, and they don’t improve your trading.

Let’s say you sold short 100 shares of XYZ at $80, with a stop just above $82—the 89 SMA on the daily chart—because your technical analysis suggested the stock was heading lower. The stock initially drops to $79 but then reverses on heavier-than-usual volume, breaking through the 89 SMA and stopping you out at $82 for a $200 loss. After consolidating for a while, the stock reverses again, breaks below the 89 SMA, and eventually drops to $73.

At this point, you might review the trade and kick yourself for losing $200 instead of making $700. But doing so is both unfair and unproductive. There was no way to know XYZ would reverse and go back in your direction. It just as easily could have surged to $92, resulting in a $1,200 loss. The next time you’re in a similar situation, you might hesitate to follow your stop, thinking, “What if it reverses again?” Instead of protecting your account, you’ll hold on longer, hoping for a turnaround—and when it doesn’t come, your small loss turns into a much bigger one.

The only thing you can control in trading is how you manage your risk and follow your plan. If you did that—entering and exiting based on your strategy—then you traded successfully, regardless of whether you made or lost money on the trade.

Looking back in frustration erodes your discipline and tempts you to abandon the very rules designed to keep you in the game. A single trade going your way after you exited doesn’t mean your stop was wrong; it means the market did what it always does—move unpredictably. If you followed your plan, you traded well. Period.

Bottom Line

It’s important to review your trades to evaluate and refine your system, identify mistakes, and look for areas to improve. But if you followed your process correctly and still took a loss, there’s no reason to beat yourself up. Losses are part of the game, and as long as you stick to your plan, they’re simply a cost of doing business. Looking back and obsessing over how you could have played it differently doesn’t change the outcome—it only weighs you down with regret and frustration. By clinging to the past, you risk sabotaging your ability to execute in the future. The market will always present new opportunities, but you can only take advantage of them if you’re focused, disciplined, and not weighed down by “what-ifs.”

Trading Mistakes to Avoid – Intro

/by

Since ancient times, people have speculated on goods, hoping to profit from rising or falling prices. If you trade stocks, options, or other financial instruments, you’re doing the exact same thing. You buy stocks or calls when you think prices will rise and sell when you think they’ll fall. If you’re right, you make money. If you’re wrong, you lose.

It’s really as simple as that. Trading is a game of chance where you risk your money on every trade. It’s probably the only “job” where you can do everything right, put in a full day’s work, and still come out losing money. Why? Because you are at the mercy of forces beyond your control. You might do all the research and analysis humanly possible, and believe with all your heart that a particular stock will go up—so you buy it. Then, out of nowhere, a news story breaks, a new regulation is passed, or a major hedge fund dumps shares to raise cash, and BOOM, the stock tanks, leaving you with a hefty loss.

You did everything right, but you still lost. How frustrating is that? Unfortunately, it’s part of the game, especially for retail traders like us, who are at a severe disadvantage compared to professional and institutional traders—what’s known as the “smart money.”

We’ll dive deeper into the smart money later in this book, along with strategies for trading with them instead of against them. But make no mistake: as a retail trader, you’re handicapped. You’re like a toddler swimming a race against Olympic athletes.

Still, you can make money as a retail trader—plenty of people do. But to get there, you’ll most likely have to go through the long, painful process of making mistakes and learning from them. Let me be clear: you will lose money. Everyone does. Read the Market Wizards books and you’ll see that every one of those legendary traders blew up accounts early on.

Ironically, the worst thing that can happen when you’re starting out is making a lot of money quickly. That’s because it’s almost always due to dumb luck, which will inevitably run out. Worse, it gives you a false sense of confidence and makes you bet big as if you actually know what you’re doing.

I know because it happened to me.

I started trading in the spring of 2020, not long after the market hit its COVID lows and began its epic march back up. On paper, it was the best time to start trading—everything was going up! But from a learning perspective, it was probably the worst.

Here’s what I did: after learning the bare basics of technical analysis, I dove right in. I bought as much TSLA and AAPL stock as I could afford, along with deep in-the-money calls. My “plan” was to hold until they split in August, then sell.

It worked. I turned $50,000 into $150,000 in a few months. Trading is easy! All I could think about was how much money I was going to make.

In hindsight, tripling my account so quickly was the worst thing that could have happened to me. My profits weren’t the result of skill, discipline, or risk management—they were the result of dumb luck.

Flush with confidence, I entered 2022 ready to trade my way to riches. And then the market pulled back hard, and I had no idea what hit me. I thought stocks just went up forever. I kept trading, and before long, I gave back all my profits—and then some.

Welcome to the reality of trading.

It took me years of trading, losing, and learning to finally become consistently profitable. I learned a lot—mostly from my mistakes. I still make mistakes, but far fewer than I used to. I also try not to repeat them (though it still happens sometimes). Mistakes are part of the job—even for the most experienced traders.

The most important thing I’ve learned is that successful trading depends far more on risk management, psychology, and understanding how the market operates than on finding the “perfect” strategy or chart pattern.

I’ve written this book to help you avoid some of the most common trading mistakes—mistakes I wish I could have avoided when I first started. I won’t cover every single mistake traders make, like fat-fingering an order or not getting enough sleep. I also haven’t included charts because the lessons here aren’t tied to any particular setup, and charts never look great in print. If you want to see one, you can pull it up in seconds on your computer.

Instead, I’ve focused on giving you clear, honest advice that’s easy to digest and put into practice. I’ve also shared some of my personal experiences to help bring these lessons to life.

I hope this book saves you time, money, and frustration—and helps you become a more successful trader.

To your success!

Trading Mistakes to Avoid – Don’t know Your Ticker

/by

Every ticker has its own personality and way of moving. Some tend to spend lots of time consolidating and then make outsized moves. Some tend to trend. Some tend to stay within specific range. Some respect the 21 sma, some the 34 and some the 89. Some like simple moving averages and others exponential moving averages. Some trade in sync with the S&P and some trade inversely to it. I can go on, but you get the point. If you want to trade a ticker you have to be familiar with how it moves. The only way to do that is to watch the ticker, on different timeframes, through different market conditions.

The more time you spend observing a ticker, the more you’ll start to recognize its patterns, quirks, and tendencies. You’ll notice how it reacts to news, behaves around support and resistance levels, interacts with volume, and responds to different market conditions. This familiarity helps you understand its typical volatility, whether it’s slow and steady or fast and erratic, and how it interacts with technical tools like moving averages or Fibonacci retracements. Developing this feel for a ticker’s rhythm gives you an edge, allowing you to set better stops, identify higher-probability setups, and know when something feels “off” about the price action. You’ll also know when to hold on even if it’s down and when to close out and take profits, even if it seems like it’s going to the moon.

For instance, let’s say you’ve been tracking a stock like Tesla (TSLA) for a while. Over time, you’ve noticed that it tends to have strong morning moves but often consolidates or pulls back in the afternoons. Knowing this, you might decide to hold onto a position in the morning, even if it pulls back a little, because you know it’s likely to regain momentum later in the day. However, if you see it struggling to break past a certain resistance level that’s held up in the past, you might take profits early, even though it’s still technically moving in your favor. Your understanding of TSLA’s behavior tells you that the stock could be reaching a point where it’s likely to stall, and taking profits before that happens can lock in a solid gain.

On the flip side, let’s say you’re trading a stock like Apple (AAPL), which tends to be more methodical and consistent in its movements. You know from past experience that AAPL often trades within a tight range during the day, and when it breaks out of that range, it can continue in that direction for several hours. In this case, you might be more patient, willing to hold through short-term volatility, knowing that once it moves, it can trend for a while. If AAPL breaks a key support level that you’ve identified, you might be more inclined to cut your losses quickly, because you’ve seen that once it starts trending down, it can keep going for longer than expected.

The key in both cases is your knowledge of the stock’s personality. It’s not just about the setup or the indicators—it’s about understanding how the ticker typically behaves and using that to guide your trading decisions. This understanding helps you trade with more confidence and avoid the emotional rollercoaster that comes with reacting to every little price movement.

Bottom Line

To sum it up, understanding a ticker’s personality is a critical aspect of becoming a successful trader. It’s not just about looking at the charts or relying on a specific setup—it’s about observing how a ticker behaves over time. The more you familiarize yourself with its patterns, tendencies, and responses to different market conditions, the better you’ll be at trading it.

Knowledge of a ticker helps you make more confident, informed decisions, rather than reacting impulsively to every price swing. You’ll know when to hold through the volatility, when to lock in profits, and when to cut your losses. Most importantly, it will give you a much needed edge in your trading.

Trading Mistakes to Avoid – Trading the Open

/by

It’s 9:28am EST and you can’t wait to trade. You know that feeling. You’ve gone over your charts, drawn your support and resistance levels, reviewed whatever you usually review and developed a few trade ideas on tickers you’ve been stalking. The premarket action is looking extremely bullish and you definitely don’t want to miss out on a nice price surge higher. The bell rings, you see a nice green candle forming, you let out a YESSSSSS and hit the buy button to open a heavily sized position. The candle pushes higher and higher on heavy volume, and then starts heading lower and lower and lower, until it turns left leaving a massive upside wick and starts moving south with speed and volume. A string of expletives exits your mouth as a stare at your P&L turning redder by the second. You hit the sell button at 9:33am to cut your loss. By 9:45am the ticker has reversed and is back in the green, without you.

What did you do wrong?

As exciting and volatile as it might seem, trading the open is one of the riskiest things you can do as a trader. Unless you’re highly experienced and have a well-tested strategy for the opening minutes, it’s best to stay clear of it.

At the market open, a flood of orders from overnight traders, institutions, and retail investors hits the market simultaneously. This creates wild, unpredictable price swings. That green candle you bought into? It was likely the result of premarket momentum spilling over, only to be followed by institutional selling or profit-taking. Without understanding the forces driving the move, jumping in blindly often leads to losses.

Smart money traders want you to trade the open. They know how eager retail traders are to chase those first big candles and use this enthusiasm to their advantage. They push the price higher to trigger buy orders, then reverse it, leaving early buyers stuck with losses—just like in the example. Another common scenario is when futures are deep in the red, and the market opens lower, enticing retail traders to jump in short. Within minutes, the market violently reverses, heading higher and leaving those shorts holding big red bags.

Another problem with trading the open is the lack of price action to work with. Chart patterns haven’t had time to form, and if you’re trying to trade a breakout, trend, or reversal, you’re highly susceptible to being faked out. Jumping into a trade based on just a few candles often leads to impulsive decisions and preventable losses.

The best way to avoid getting burned at the open? Sit on your hands. Watch and wait for the first 10 to 15 minutes. Let the initial chaos settle and the price action begin to paint a clearer picture. If you feel you must trade, do so with a very small position size. You can always add to the position later once you have more confirmation and the risk is lower.

 

Trading Mistakes to Avoid – Ignoring Major Levels

/by

One of the fundamental principles of technical analysis is the concept of support and resistance levels. These are price levels where large numbers of buyers or sellers have historically been active. The more often these levels hold, the stronger they are considered to be. When a level breaks with strong volume, the price can make significant moves in the direction of the breakout.

Ignoring or being unaware of major support and resistance levels is often a costly mistake that many traders make. Regardless of your particular trading system, getting into a trade without knowing where support and resistance levels is like trying to drive through a brick wall. In most cases, that wall is going to stop you, at least temporarily.

Sure, support and resistance level break eventually, but the odds of that happening are stacked against you. Most experienced traders will wait until the break with volume, or a low volume retest of the break, before taking a position. Those that want to anticipate the break will do so with smaller sized positions to manage their increased risk.

If you’re day trading on a lower timeframe chart, it’s not enough to identify support and resistance levels on that chart alone. You also need to consider S&R levels on higher timeframes, as they tend to carry more weight. For example, imagine you’re trading TSLA on a 1-minute chart. The stock is at $412, and you spot a clear support level at $410. You decide to buy shares at $412 (or call options) and set your stop at $409, just below support. This trade seems well-structured—until you check the 15-minute chart. There, you notice a strong support level at $407. Had you considered this higher timeframe, you might have placed your stop below $407 or waited for the stock to approach that level before entering the trade. Instead, by focusing solely on the 1-minute chart, you miss the bigger picture, get stopped out at $409, and watch the stock bounce off the $407 support.

You also should consider identifying Fibonacci levels and pivot points, which often act as support and resistance levels on all timeframes. These levels are based on past price action and mathematical calculation that are explained in detail by Professor Google. For our purposes, it’s enough to know that traders watch these levels and tend to respect them, making them important areas of support and resistance. Ignoring them can prove costly.

One of the most frustrating situations you can get your self into is entering a long position and then noticing you did so just below VWAP or another major level that will likely act as resistance. You might still come out a winner, because resistance level do break, but if you’re trading short dated options, Theta burn could kill you while you wait. You’d much rather enter the position just above VWAP with your stop below it.

Bottom Line

Before you enter a position make sure you are aware of the major levels that could act as support and resistance.

 

Trading Mistakes to Avoid – Unaware of Market Movers

/by

When you’re in a trade, you can’t just focus exclusively on price action, volume and the other technicals you use. You also need to have an awareness of stock and general market related events that can have a significant effect on your position. Being unaware of, or ignoring, these events can blindside you and bloody your account.

I’m not referring to unexpected events, which you can’t do much about. I’m talking about scheduled events such as earnings releases, jobs reports, CPI inflation data, geopolitical developments and any sort of announcement or statement by the Fed that can cause significant movement in the price of the security or market you are in the midst of trading.

Suppose you’re trading crude oil or an oil related security, such as XOM or OXY, ahead of a scheduled 2:00pm OPEC meeting at which they will decide whether or not to cut production. Their decision will likely cause movement in the oil market and your stocks, so unless you’re looking to gamble, you probably want to wait until after the decision to take a trade.

Similarly, earnings reports can be landmines for individual stocks. Let’s say you’re holding shares of a tech company, and their quarterly earnings release is scheduled for after the market close. Even if the company beats analyst expectations, the stock could still drop due to weak guidance, shrinking margins, or simply because the market had already priced in the good news. Conversely, a stock might surge on seemingly mediocre earnings if the market was overly pessimistic leading up to the report.

The point is, earnings announcements often defy logic and technical analysis. If you don’t factor them into your trading plan, you could find yourself on the wrong side of a massive move. At the very least, you need to be aware of when these events are happening so you can adjust your position size, tighten your stops, or even stay out of the trade altogether.

This is even more applicable to options because of the way earnings releases impact implied volatility (IV), a key component of options pricing. In the lead-up to an earnings announcement, uncertainty about the outcome tends to drive up IV. This means options premiums—both calls and puts—are inflated as traders position themselves for the potential big move.

Once the earnings report is released, that uncertainty vanishes. The market now knows the numbers, and the stock’s reaction (whether up or down) has already begun. This sudden reduction in uncertainty causes IV to collapse, a phenomenon known as IV crush.

Let’s say you bought a call option ahead of earnings, betting that the stock will rise. The company reports great earnings, and the stock moves up slightly, but your option doesn’t increase in value nearly as much as you’d hoped—or worse, it loses value. Why? Because the drop in IV after the earnings release slashes the premium of your option. Even though the stock moved in your favor, the decrease in IV offset the gains from the price move, (On the flip side, options sellers benefit from IV crush.)

Jobs reports, CPI data, and other major economic indicators can have a similar effect, but on a broader scale. These reports are scheduled well in advance, and they tend to move entire markets rather than individual stocks. For example, a stronger-than-expected jobs report might cause the market to fear aggressive rate hikes from the Fed, leading to a sell-off in equities. On the flip side, a softer-than-expected CPI number could spark a rally as traders bet on a more dovish Fed.

When trading ahead of these reports, it’s essential to understand how the market is likely to interpret the data. Keep in mind, though, that the market doesn’t always behave rationally. Sometimes, a seemingly negative report will trigger a rally, or vice versa, because the market was positioned for an even worse outcome. In either case, sudden price moves powered by automated algorithms can wreck your position by stopping you out on a wick, before reversing in your direction.

Fed announcements, press conferences, and even comments from individual Fed officials can also cause wild swings in the market. For example, if the Fed chair hints at a pause in rate hikes during a speech, the markets could spike sharply higher. On the other hand, hawkish commentary could trigger a broad sell-off. These events are on the calendar, and you need to know when they’re coming. Being caught in a leveraged position during a Fed announcement is not a place you want to be.

If you’re sitting in a long term position, then most of these events will probably not effect your position. In most cases you probably won’t even realize that anything happened, especially if you don’t watch intraday price action. But if you’re an active trader, especially one who trades short-term positions or options, ignoring these events is like walking an obstacle course blindfolded. Scheduled events like earnings, economic data releases, and Fed announcements create an environment of heightened volatility, which, if you’re not prepared for, can potentially leave you with a severe case of whiplash.

Bottom Line

The key takeaway here is simple: know the economic calendar. Before entering a trade, check for any upcoming events that could impact your position. If you’re trading options, pay special attention to how implied volatility might behave before and after the event. If you’re trading stocks, understand how similar events have affected the stock in the past. This doesn’t mean you can predict what will happen, but it does mean you can prepare for multiple scenarios.

Remember, trading isn’t about avoiding risk altogether—it’s about managing it smartly. Knowing what’s on the calendar gives you a chance to prepare and avoid unnecessary surprises. By keeping an eye on scheduled events and adjusting your strategy accordingly, you’ll protect your account and might even find opportunities to turn volatility to your advantage. The easiest and safest way to avoid getting blindsided by a scheduled event is to simply not enter a position ahead of it. The market will throw enough curveballs on its own—don’t let the ones you can see coming trip you up.

Trading Mistakes to Avoid – Too Fast and Furious

/by

A common account killer for newer traders is the desire to trade fast moving and volatile tickers, before they’re prepared to do so successfully. These could be highly liquid, big cap tickers (SPX, TSLA, NVDA, NFLX), memes gone wild (GME, AMC) or less expensive and less liquid stocks making moves on rumors or news. The common denominator in all of these is that they can make fast and sharp moves and then reverse just as quickly, and rinse and repeat until you slam down your laptop screen and surrender.

Why would you want to trade these types of super volatile tickers? Simple. Because the more volatile a ticker is, the more green you can make — if, of course, you trade it right. That’s where things get really complicated.

Since the more volatile, highly liquid tickers are often hundreds of dollars per share, many traders trade options on them instead of common shares. SPX options, for example, are a favorite among day traders for their insane price swings. But those swings come at a price—literally. Same-day or next-day SPX options can cost anywhere from several hundred to a few thousand dollars per contract. The appeal? Fast, potentially massive moves. The downside? Just as fast, you can be down 50% in minutes. On top of that, same-day options suffer brutal Theta decay—their time value evaporates over time, even when the underlying stock doesn’t move much. Flat price action or minor moves in the wrong direction can drain your account if you simply hold your position.

SPX vs. SPY: A Safer Alternative

The safer alternative to trading SPX is SPY, which is 1 tenth of the price of SPX, which means SPY options are around a tenth of the price of SPX options. The spreads on SPY options are also much tighter — they are usually a few cents as opposed to a few dollars for SPX. The spreads alone on SPX options can be a dollar or 2 wide, which can turn a green trade red just due to slippage on the entry and exit. But because it’s a tenth of the price, SPY will give you a tenth of the payoff, assuming the same number of contracts.

Here’s why this matters: trading SPX options with a $5,000 account is like bringing a paper boat to a hurricane. A single SPX contract priced at $1,000 risks 20% of your account. Get that wrong a few times and you’ll be out of business quickly. Even if you plan to cut losses at $500 (which is still 10% of your account, but better than twenty), the speed of SPX’s moves, combined with deteriorating Theta and potentially IV, can blow through your mental stop before you have a chance to drink your coffee. Without a hard stop in place, you’ll watch helplessly as your position crashes and burns. Even if you’re playing with a larger account, your average SPX call can still take a big bite out of it very quickly, especially if you have more than one.

In addition to the significant financial consequences of trading short term SPX options, your nerves and blood pressure can get an oversized workout as well. If your SPX position represents a significant portion of your account—enough that losing it would cause real pain—you’ll find it incredibly stressful to watch the price action and your position fluctuate. It’s fine if the price is going in your direction. But if the tide turns against you, that red is going to start piling up fast, along with all the physical effects that go along with the stress and fear of losing.

Your ability to properly trade volatile SPX contracts will also be impeded if the risk you’ve taken on is too heavy for you to bear with grace. There’s a good chance you’ll either end up taking profits too early for fear of losing (which is the lesser of your problems) or you’ll get our of the trade too soon because you can’t handle the red, even when the trade is still within the parameters of your trade plan. The fast moving price action on SPX contracts can make even experienced traders weak in the knees and cut prematurely.

Finally, if you do end up taking a significant loss (which in the scope of normal trading odds is highly probably) that hurts your account, you’ll feel defeated and your confidence to trade again will be shaken. If you lose a few times in a row, you’ll end up in even worse psychological shape, possibly too afraid to trade again.

Speaking from personal experience, trading short term SPX contracts with a smaller account often feels like riding a roller coster wearing a blindfold while being shot at. You have to be super quick and careful to manage your position amidst sudden volatility, and mindful of periods of flat price action that can steadily drain your premium so that even though you’re right on the direction you end up red because of Theta burn. And taking a significant loss feels like getting slapped in the face by an angry ex — painful and humiliating.

The best way to trade SPX options is to trade SPY options instead (and I mean just 1 or 2 to start with, not 10), so that you can get some experience without risking nearly as much. You can always buy more SPY contracts and eventually transition to SPX, if that’s what you decide.

Stocks can also be extremely volatile, with wild and sudden price swings that can shake you out of positions and break your account. Remember the wild price action in GME in January, 2021? If you tried to day trade it, you could easily have gotten smacked in the face in minutes, if you got in and out at the wrong times. There are plenty of pump and dump schemes happening daily on various less traded stocks that can be manipulated for a quick spike or drop, allowing the manipulator to make a quick buck while you end up holding the bag. Large cap stocks, like TSLA for example, can also make quick, extreme moves that can make your position turn red before you know it (especially short term options).

Risk management is more difficult with volatile tickers because your stops usually need to be wider to account for the larger swings, which means you’ll need to either risk more or decrease your size. If you’re only trading a single expensive contract, lowering size isn’t an option.

Solution

The obvious solution to the “too fast and furious” problem is simply to avoid trading super volatile stocks. It might sound counter intuitive to tell a trader to avoid trading volatile tickers, which can potentially net you major profits. But until you have some solid trading experience under your belt, these tickers will rob you and leave you for dead before you can yell HELP. Besides the financial hit, they will leave you with psychological scars, crush your confidence and potentially make you unable to continue trading.

Here are some suggestions for dealing with this situation:

  • Trade SPY with small size to learn how the price action moves. If you’re looking to trade E-minis, try the micro e-minis, which are a tenth of the size.
  • Trade slower moving tickers. If you want more action, trade them with slightly larger size.
  • If you insist on trading short term SPX options, the best way to do that is to only trade with money that you are willing to lose —  100%. I follow an SPX options trader (although I personally don’t trade them) who posts some of his trades. When a trade goes against him he’ll often hold his contracts even until they go down to zero, and many of those trades end up turning around and turning green, for a profitable exit.  Many of those SPX contracts are expensive, but since they make up only a tiny percentage of his account, he isn’t by the thought of losing that money, which is why he can continue holding them and exit green. If an $800 or $1000 contract will make you crap your pants if it goes to zero, then you’ll end up cutting your losses and missing out on a win. Granted, if you followed your trade plan and ended up with a loss, then consider it a good trade. But too many of those “good” trades will eventually put you out of business, and SPX options can expedite that process for you.

Bottom Line

Trading volatile tickers, especially SPX options, might seem like the fast track to big profits, but they come with massive risks that can derail your account and your confidence. The smarter play? Start small, trade slower tickers, and build your skills. Trading is a marathon, not a sprint, and surviving the race is the key to winning it.

 

 

Trading Mistakes to Avoid – Distracted by News

/by

Retail traders often get burnt trying to trade the news. They spend lots of time and energy finding, researching and analyzing news stories related to the overall market or a specific sector or stock, and then place trades based on their analysis and determination. More often than not, they end up on the wrong side of the trade, even when their analysis was spot on. Just to be clear, there are definitely some retail traders that excel at trading the news. The overwhelming majority don’t.

Why is trading news a bad idea for most less experienced retail traders?

Let’s dive in and take a deeper look.

There are roughly two types of news. There’s news that is anticipated and news that is a surprise.

Anticipated News

Some examples of anticipated news are:

  • The Fed is expected to raise rates by a quarter point at the next Fed meeting, which should mean lower prices for stocks.
  • Congress is expected to pass a law legalizing marijuana.
  • A state is expected to legalize sports betting.

In each of these example, the news is anticipated months ahead of the actual event, allowing traders to plan and prepare.

The problem with trying to trade anticipated events is that when they finally come to fruition, the market reaction is usually the opposite of what logic would dictate it should be. The Wall Street adage goes like this: “Buy the rumor, sell the news.”

For example, the Federal Reserve often signals its intentions regarding interest rate hikes or cuts well in advance. In 2018, the Fed signaled multiple rate hikes throughout the year. Markets reacted ahead of each official announcement, with sectors like financials rising in anticipation of higher rates. However, when the actual rate hikes were announced, the markets often sold off. Why? The hikes had already been priced in during the months of speculation, and traders used the official announcement as an opportunity to take profits.

For another example, assume that Congress is scheduled to vote on legalizing marijuana and your considering buying pot related stocks with the assumption that they will surge higher when the law is passed. By the time you’ve heard this news, the smart money has already been accumulating these pot related securities for some time, which is why you’ve noticed the prices rising. But the vote is still a month a way, so even though the stocks have moved a significant amount, you figure that there’s still time to buy in ahead of the vote. So you buy the pot ETF MJ, up 15% on the month, planning to hold it to take advantage of the anticipated pop when the bill is passed. The day of the vote arrives and your sitting at your desk glued to your screen, ready to watch MJ, and your account, hit new highs. The news flashes across your screen: Congress Passes Pot Legalization Bill. Woohoo!! The stock does a quick wick up and then, just as quickly starts selling off with a vengeance. Sell the news strikes again…and your position is deep red and bleeding off.

What happened in this scenario is that smart money priced in the law passing several months before the actual vote, and accumulated the stock over that time, steadily driving up the price. As the date of the vote got closer, retail traders finally got the news and started piling in and driving the prices even higher. While retail was FOMO buying, the smart money was selling to them, as they began to unwind their position and take profits. When the vote finally passed, retail traders got super excited and started to buy, which cause the stock to momentarily spike, at which point the smart money took the opportunity to pull the rug out and start a wave of massive selling on huge volume. Understand that these smart traders bought their securities months earlier and huge discounts and were now selling and booking giant profits. Wouldn’t you do the same?

The only way you can trade anticipated news is to get into sync with the smart money, and the way to do that it to closely monitor the volume behind price moves (as discussed in Chapter XX). In most cases you’ll be buying the rumor ahead of the anticipated event and selling the news after the event has taken place.

The exception for this playbook is in cases where the anticipated outcome does not materialize and the smart money gets caught on the wrong side of the trade. For instance, say the smart money consensus is that the state legislature is not going to pass a bill legalizing sports betting and therefore, institutions have been selling off some of the relevant gambling stocks. Then the legislature passes the bill taking everyone by surprise. Now the smart money needs to reverse course and starts piling into the gambling stocks, gapping them up and pushing them even higher on heavy volume.

Another example of this is in 2016, when many investors assumed Hillary Clinton would win the U.S. presidential election. Stocks like renewable energy companies rallied on this assumption, while coal and oil stocks were sold off. When Donald Trump won, the consensus was overturned. Coal and oil stocks spiked, while renewable energy stocks took a hit, reflecting the sudden shift in expected policies.

That’s right, the smart money gets it wrong sometimes too.

Surprise News

The surprise kind of news happens without warning. Here are some examples:

  • A war unexpectedly breaks out in the Middle East.
  • A storm damages several oil rigs.
  • A company releases unexpected guidance.
  • Fraud is uncovered in a major, publicly traded company.
  • A bank reveals that it is insolvent.

All of these examples are news events that take the market by surprise and could trigger significant market or stock price moves. The tricky thing about surprise news is that what might come as a surprise to you, is unusually already old news for the smart money.

How can that be?

Simple. The smart money has unlimited funds to buy faster access to information, better networks, and sophisticated algorithms that scour news sources and social media for any hint of market-moving events. Institutional traders may even get early warnings through industry connections or proprietary data feeds that aren’t available to retail traders.

I personally follow options flow and I can’t tell you how many times massive call or put buying comes in the day before a “surprise” piece of news is released, verifying the options bets. Is it illegal insider trading? Who knows and who cares. The only thing that should concern you is the knowledge that the smart money has information that you don’t, and can and will act on it before you even hear about it. By the time you see the news flash on your screen, the smart money has likely already reacted, and the price has adjusted to reflect their actions.

For example, the sudden collapse of Silicon Valley Bank caught many retail investors by surprise. However, large institutional players reacted quickly to reports of the bank’s liquidity issues, which surfaced before the official announcement. When the news broke, the smart money had already positioned themselves, shorting the bank’s stock or rotating into safer assets.

There are also cases where news stories or rumors will hit the wire and cause a steep market reaction only to be proven as false moments later. Many of these fake stories could very well be generated by smart money traders looking to exit or enter positions. In other words, they’re looking to trigger retail FOMO and get traders to chase a fake story backed by an initial, smart money generated, price spike. Once FOMO hyped traders start buying (or selling) into the spike hoping for continuation, the smart money takes the other side of the trade, causing the price to reverse as quickly as it spikes and leaving stunned horde of red bag holders.

A classic case of fake news influencing markets occurred in 2013, when the Associated Press Twitter account was hacked. The hackers posted a false tweet claiming there had been explosions at the White House, causing the Dow Jones Industrial Average to drop nearly 150 points within minutes. Smart money algorithms were quick to capitalize on the panic, selling at the top of the initial spike and buying back in as the market corrected once the news was debunked.

Bottom Line

Trading the news is a game where the odds are stacked against retail traders. While there are exceptions, most news events are already priced in or are frontrun by smart money. By the time you hear the news, you’re already late. The smart money has already acted on it. Getting in late to the game will most likely leave you buying at the top or selling at the bottom.

Instead of jumping in on news, wait for the market to stabilize and confirm the direction before making a move. Just remember that the smart money is likely already several steps ahead, so unless you’re sure you can trade in sync with them, better to sit on the sidelines, same your money and wait for the type of setups you know you have a good chance of winning.

 

Trading Mistakes to Avoid – Ignoring Volume

/by

We already touched on this point in the previous chapter about following the smart money, but it’s arguably the most important factor in trading in harmony with the smart money, so it’s worth while reinforcing and expanding upon.

Price moves on heavy volume indicate smart money activity. If you are trying to follow the smart money, as you should be, then volume is your primary guide and informant. Retail traders simply don’t generate the type of huge volume bars you often see behind big price moves. Only institutions and hedge funds have the fire power to push prices, and when they do, it’s clearly indicated in the volume bars you see on your stock charts. I’m not referring to cheap, illiquid, low flow stocks, or occasional meme stock outliers like Gamestop, where retail traders could have a short term effect on pricing. I am referring to highly liquid stocks that trade millions of shares daily. These stocks can only be moved by heavy, institutional volume.

Watching the volume will help you identify stocks to buy and sell, and keep you from getting faked out of your positions on temporary pops or drops in price.

Take Apple (AAPL), for example, one of the most widely traded and liquid stocks on the market. Let’s say you see it break out of a consolidation zone above a resistance level, but the breakout happens on below average volume. That’s a red flag. Without significant institutional participation the move is likely to fail, and you could find yourself chasing a false breakout. On the other hand, if AAPL breaks out on a volume surge two or three times the daily average, that’s a strong indicator that the smart money is behind the move. Institutions don’t just dabble; when they commit, it’s clear in the volume. This is when you want to go along with the momentum and ride the wave.

Let’s look at Tesla (TSLA), a notoriously volatile stock. Imagine TSLA is experiencing a significant pullback after a sharp run-up. You see price testing a key support level, such as the 200-day moving average, but the volume during the pullback is light. This could indicate a lack of conviction from sellers, signaling that the pullback might just be a brief pause before a  continuation higher. However, if the price drop to the 200 is on high volume and breaks through, it’s more likely that the smart money is unloading their positions, and you’d want to avoid—or short—the stock.

Volume can also help you avoid getting faked out during sudden spikes or drops. Consider Nvidia (NVDA), a favorite among traders. If the stock suddenly spikes 3% on news but does so with minimal volume, it’s likely a short-term retail-driven reaction. Jumping in could leave you holding the bag as the price retraces just as quickly. Conversely, if the spike happens on a volume surge well above the average, it’s more likely that institutions are driving the move, and there could be follow-through in the days ahead.

It’s not just about spotting entries either. Watching volume can help confirm when it’s time to exit. Imagine you’re holding Meta (META), and it’s been climbing steadily for weeks. One day, it gaps higher on unusually light volume in the premarket, and then during the regular trading session, it starts selling off with significantly higher volume than usual. That’s often a signal that institutional sellers are stepping in, and the stock could be topping out. Exiting at that point can help you lock in profits before a potential downturn.

Volume can also help you avoid getting faked out during sudden spikes or drops. Say NVDA suddenly spikes 3% on news, but does so with minimal volume – it’s likely a short-term retail-driven reaction. Jumping in could leave you holding the bag as the price retraces just as quickly. Conversely, if the spike happens on a volume surge well above the average, it’s more likely that institutions are driving the move, and there could be follow-through in the days ahead.

A pop on low volume is a sign to wait and see, not to jump in. The pop could be retail traders driven by FOMO wanting to get in on action. The smart money could also be pushing the price higher to trigger retail FOMO and create the liquidity they need to start exiting their positions and collecting their profits.

Bottom Line

The key takeaway is that volume gives context to price. Price alone doesn’t tell the whole story. High-volume moves are the footprints of the smart money, and by paying close attention to those footprints, you can make better trading decisions. Ignoring volume, on the other hand, is like trying to drive wearing a blindfold. You’re bound to crash, sooner or later.