How to Avoid Failure as a Trader: Throw Out the “Hopium”

From the Eurozone’s Greek crisis to the dizzying plunge of the Chinese stock market to Puerto Rico’s own ticking debt bomb, global investors are now grappling with two of their worst enemies: greed and fear.

The legendary investor Warren Buffett perhaps put it best: “You want to be greedy when others are fearful, and fearful when others are greedy.”

The herd mentality is hard to resist. Many investors behave like lemmings and march right off a cliff. They succumb to the “group think” of the media, friends, the internet, colleagues, family – everyone telling them what stock or investment to buy, everyone ready with brilliant advice.

But what I’m going to tell you right now is why that mentality is totally wrong

Consider what I call the “Recipe for Trading Disaster”:

  • 1 part lack of knowledge
  • 1 part lack of experience
  • 1 part intuition
  • 1 part “hopium”

Mix all of these ingredients together and let them boil over alarmist headlines, such as we’ve seen this week, and you have a recipe for big investing mistakes.

Too many investors know just enough to be dangerous, and perhaps start out small by investing in a stock they see touted on television. And maybe they pocket a few modest gains. It’s what comes next that really hurts them. Lack of experience prevents them from understanding and learning from their mistakes.

If they win a few times, their flawed intuition kicks in and they start risking more than they should at the wrong time. That’s because they become convinced they are right and the markets are wrong.

So what’s hopium?

Like opium, it’s an invisible drug in the mind that causes investors to believe that the rules don’t apply to them. Hopium is what keeps investors believing that their ability to pick winners from their intuition, without empirical evidence, is real.

When investors are hooked on hopium, winning every now and then will continue to give them an ample shot of the drug to keep them in the game. When investors on hopium lose, they believe it was because of the markets rather than any fault of their own.

This in turn keeps investors going, re-depositing money into their accounts, and doing the same thing over again, expecting a different result. In fact, hopium traders are what we call the “donators” and they account for a lot of money made by professional traders. In the game of poker, it’s said that if you sit down at the table and you can’t spot the sucker in 15 minutes, guess what? You are the sucker.

Trade With Logic, Not Emotion

Why do I bring up all of this now? Because under today’s volatile and news-driven market, now is a particularly important time for investors to think logically.

I am not saying that I always make money no matter what the market does. I sometimes lose on trades. When fewer than 10 stocks in the S&P 500 are up on the day, there’s a high probability that I have positions that will drop in value. There are times when I close out trades at a loss. It happens. It’s what we do next that matters. Do you stick to your rules through thick or thin, or do you throw them out due to fear?

Whether trading over the short or long term, I always follow the signals produced by my patented Money Calendar. These rules are based on economic and financial trends – the broader context of your investments – instead of the ephemeral, day-to-day movements of the markets. Rather than getting spooked by a headline coming out of, say, China or Greece, I analyze historical patterns that go back more than a decade.

There’s a difference between lasting, substantial net worth generated as a consequence of a methodical investment approach, exemplified by my Money Calendar… and a greedy investor high on “hopium” who tries to grab a quick buck without following rules. The former accumulates wealth; the latter tends to benefit (and eventually lose) from random occurrence, as if playing in a casino.

So, throw out the hopium! Power Profit Trades never touches the stuff.

Next issue, I pinpoint a new, profitable opportunity that’s quickly coming up on my radar screen.

Until then…

Tom Gentile

America’s #1 Trader

11 Responses to “How to Avoid Failure as a Trader: Throw Out the “Hopium””

  1. Tom, I appreciate your expertise and historical computing power! Reflecting on our APPL July(4) 130/135 spread it is hard to buy more AAPL (Aug 130 calls) in the face of broader market chaos/doldrums. But this pent-up Hopium needs to go somewhere so I will apply it to “the rules.” Thanks for the reality check.

  2. Allen Schwalb

    I’ve been trading options for a long time. I like buying long term options but on a short term (1-2 months) I’ve been successful in selling options because I believe most short-term buyers lose. As much as I believe in technicals, you can’t predict world events or the’black swan’ event that is going to wipe out the short-term option buy. I’ve just subscibed to the Money Calendar Alert’ to see if I can make some money buying options short term but without knowing anything about your methodology, I am cautiously skeptical

  3. Well that sounds like me. I am glad to hear I am not the only delusional person in this process. However, in the last 5 years I have been more serious studying how to watch the fundamentals, technicals, social noise, etc. Still I feel there is something missing. 15 years ago, when I studied seasonal trades, I wished it could have been digitized. Probably is now. But your program really sounds interesting and would augment my need to see probability. I like the metrics of it. I hope there is a little support until I can roll with it.

  4. Tom, I am a new subscriber but I have not seen any Stop Loss instructions to limit the risk. I see Exit stratagies on the upside, ie. double your money. But nothing on the downside. For instance GS dropped in price substantially from the entry price of $212. It went down to the $203 range. That’s a significant price drop on a Call Option. With a looming correction, how do we Exit to the downside.

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