Let’s be real, trading is really damn hard! But you can drastically increase your chances of making a career out of this endeavor by avoiding a few key areas. By avoiding these areas, trading becomes a lot less sexy in the short term, but you set yourself up for asymmetric returns over time.
1. Avoid trading penny stocks. The reality is most penny stocks are trash, and if you aren’t quick, you’ll often lose 10, 20, 30, and sometimes even 50% or more of the money you put into the trade. This sadly applies to both the long and the short side. On the short side, these names often open you up to infinite risk on the upside, and all it takes is one.
2. Avoid trading with leverage. When you trade with leverage, timing becomes that much more important, which of course makes trading that much more difficult. Maybe you are one day early on that huge mean-reversion long. Well, if you are trading with leverage, there’s a good chance you’ll feel the need to puke it, and rightfully so, and miss the big reversal setup. Leverage demands perfection in a game that doesn’t reward it all that often.
3. Avoid trading leveraged ETFs. These decay in nature, and they make that very clear in the prospectus. They are designed to make the people who create them rich and the people who trade them poorer.
4. Avoid trading options. Options not only require impeccable timing, but also require you to know where stocks are going. Again, it’s another leveraged bet you really don’t need.
The good news is, now that we know what to avoid, it’s pretty easy to know what to focus on. All of the best traders and hedge fund managers seem to align on one thing: buying great companies at great prices. By avoiding penny stocks, not trading with leverage, ignoring leveraged ETFs, and avoiding options, you open yourself up to asymmetric returns by buying great companies at great prices.
There are a thousand ways to skin this cat, but it’s an important skill set to develop. And by avoiding these pitfalls, while timing and the price you paid still matter, you don’t need perfection to crush it in the market.
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