Avoid This Common Pitfall

Amazingly, one thing that I have discovered in my experience
and through speaking with others, is that the satisfaction level most subscribers
have with these kind of services normally depends more on the subscriber than
the service. I’ll say that again. The satisfaction
level a subscriber typically has with a stock-picking subscription service depends
more on the subscriber than the service. Further, traders with some
experience trading typically get more out of these services than true beginners.

Why is this? Why would experienced traders many times get more
from these services than beginners, and what can you do to make sure you get
the most out of your services?

I believe the biggest reason that more experienced traders many
times realize greater benefits is their attitude towards the service, and how
they use it. When a beginning trader purchases a stock-picking subscription,
many times they will expect that service to produce certain returns for their
account. This expectation, whether it’s for the majority of their trading
income, or just a portion, is rarely met.

Some beginning traders enter a subscription agreement with the
attitude “I don’t really know what I’m doing. If I can just
follow this guy’s picks until I know what I’m doing, then I’ll be
fine. I’ll just pay him to do my thinking for now.”

Other beginning traders use a less extreme but still unrealistic
thought process along the lines of, “If I can make ‘x’ amount trading
his picks, then I only need to do ‘y’ amount on my own.”

In either one of these cases, the beginning trader is avoiding
taking responsibility for the trades that he is going to put on. In the beginning
trader’s mind they’re not really “his” trades. They are
the “expert’s.. This line of thinking is fraught with pitfalls.

First, the beginning trader many times will not use proper money
management techniques on these trades. This problem can take many forms. Beginners
will many times risk too much because they put too much faith in the “expert’s”
picks. They will take position sizes that far exceed their comfort level. If
the “expert” suggests stops for these positions, the beginner may
decide to give them a little more leeway, because the “expert’s”
picks are considered golden.

This will eventually bite them. If they do use the stops of
the “expert,” then these stops can sometimes be at levels that the
beginner is not comfortable with. This will cause great anxiety for the beginner
and may result in his exiting these positions before he
should. Another potential pitfall is that they may be less inclined to take
profits at points where they should be taken — once again because the
“expert’s” picks are so good. They may also bet bigger after
a string of losses, because they think their expert is “due” for
a big hit. These are all mistakes.

When the beginner doesn’t accept responsibility for the
trade, not only will they frequently mismanage it, but they will blame the “expert”
for their losses. This blame will cause them anger towards the “expert.”
“This jerk is costing me a bunch of money.” This will many times
lead to the beginner having a bad experience, canceling the service, and subsequently
determining that “This guy’s methods don’t work. I’m
going to try something else.” Guess what? It starts all over again with
a new subscription and can become a vicious cycle.

The experienced trader, on the other hand, understands that
they will not be able to use their subscription as a crutch. Their expectations
are significantly different, and many times they are able to reap great benefits
from the same services. Rather than depending on the service for trading ideas,
they use it as a supplement to their own research and a way to better understand
the trading methods that the “expert” employs.

Rather than trusting the “expert’s” picks
more than their own, they trust them less. There are good reasons for this.
The experienced trader knows that the market is dynamic. Between the time the
trading idea is published and the present, the “expert’s”
opinion may have changed. When that happens, the expert can quickly make the
proper adjustment. The subscriber may not be able to.

The suggested trade could also be a typo. “Buy
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may not be what the “expert” meant at all. He may have thought
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was a good buy. The experienced trader understands that although the “expert”
is doing his best to provide profitable trading ideas, the trades are ultimately
his responsibility. He therefore will research and approve each idea before
taking the trade.

In addition to using the subscription as a supplement to their
own research, the experienced trader views it as an opportunity to fine-tune
their understanding of the “expert’s” techniques. By gaining
a better understanding of the proper setups, entries, and exits for their trades,
they will improve their own trading. If the service is no longer available,
they will be able to stand on their own two feet without it. This should really
be the goal of any trader.

So if you’re thinking of subscribing to one of these services,
make sure you have the proper mindset before doing it. By gaining access to
the “expert” along with supplemental trading ideas, they can provide
wonderful benefits. Without a basic understanding of the “expert’s”
techniques along with the proper mindset towards the trades, you will rarely
realize these benefits.

Since I’ve gone on so long about this today, I’ll
keep the market commentary short and sweet. I continue to be amazed at the resiliency
of this market. Every selloff seems to be met with buying. I would focus on
the long side. As always, be cognizant of potential short opportunities and
keep an eye out for signs of trouble.

Good trading,

robhanna@rcn.com