E Good-Better-Best

In life, we often have to make many choices between good, better and best. A great example of this is how we spend our time.

  • GOOD: Spend an hour per day on social media keeping in touch with family and friends.
  • BETTER: Spend that time talking with family and friends personally.
  • BEST: Spend that time with your family instead of keeping up with the lives of people you barely remember from high school.

In trading, there are also many choices between good, better and best. For example, many new investors spend lots of time and energy staying up to date with the latest news events on the stocks that they own. Some might state that this is a “good” use of their time. We would argue that a “better” choice would be to spend that time focused on the management of the trade (risk, reward, position sizing and probability of success). Finally, we would say that the “best” choice would be to apply technical and fundamental analysis before ever entering the trade.

We have never met a highly successful trader who became successful because he or she panicked better than everyone else. Following the latest news story is a panicky way of trading. The idea that you will capture the news, place your trade and profit from it on a regular basis is a flawed idea. The reality is that in today’s world of high frequency trading systems and algorithms, prices change far too quickly for any non-professional trader to profit based on speed.

Instead, the best choice is to do your work ahead of entering into the trade and to then be very skeptical of any and all news. Often, people will buy and sell poorly because they trade the news announcements backwards. In fact, they typically buy on the good news right as professionals are selling!

The professionals were buying before any news hit the wires because the fundamentals and technicals had been improving. Then, the professionals use the big spike higher in the stock (on the news release) to take profits. Thus, the famous adage of Wall Street, “Buy the rumor and sell the news!”

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