Stocks and Commodities Magazine

Avoiding Common Trading Errors

What is the biggest mistake you see traders make?

We all know that trading, particularly on leverage, is a difficult venture. Consequently, the odds of committing mistakes outweigh the probability of the perfect trade. With that said, I’ve both made, and witnessed, plenty of mistakes throughout my career. The most common, and perhaps the most detrimental, is the human tendency to chase markets. The general public wants to become bullish after a market has already nearly exhausted a rally, and bearish while prices are in despair. Those that don’t chase markets, often make a similar mistake of holding on to losers only to bail on the trade at precisely the worst time. Warren Buffett said it best, “Be fearful when others are greedy, and greedy when others are fearful.” Yet, emotion entices us into doing the opposite.

The theory behind the behavior of buying high, and hoping to sell higher; or selling low, with the intention of buying it back even lower, is trend confirmation. Nearly any trading book you pick up with have the text “the trend is your friend”, so it isn’t surprising that we are trained to chase prices. Too many want the comfort of knowing that market momentum is moving in their desired direction before they commit their hard-earned money. However, if the trader’s confirmation process is lengthy, it is quite possible that just when they feel the most comfortable buying is exactly when they should be looking to sell, or at least remain on the sidelines. This is an unfortunate cycle that occurs over and over again in markets of all types. Some notable cases are the 2006 real estate bubble, the gold and silver boom of 2011, and the latest example is the 2014 spring lean hog rally.

The markets have an inexplicable way of reversing at a price point that will cause the maximum amount of pain, to the highest number of traders. Recent action in the lean hog market is a perfect example of how bullish exuberance can come to a screeching halt causing agony to traders on both sides. In early 2014, lean hog futures were in a relatively normal up-trend but by late March the market suddenly went parabolic on speculation of a deadly pig virus, known as PEDv, pinching supplies ahead of the summer grilling season. The virus was discovered in May of 2013 (nearly a year prior) and as of a December 2013 USDA Report it wasn’t expected to have a significant impact in output; yet as the story hit main stream media; fear and greed went to work.

 

Read more about common mistakes made when trading commodities in the July 2014 issue of Stocks & Commodities Magazine

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