Markets can be humbling, but this single trick can help you stay in the zone and the green.
Trading stocks can be a humbling business, but there’s one tool you can use to help manage the risks.
It’s a crucial idea that helps keep your investing decisions objective and avoids costly emotional trades according to Real Money Columnist James “Rev Shark” Deporre.
“When I first started trading I believed that the best way to make money was to focus on making predictions,” Deporre wrote recently. “What was the market going to do in the months ahead? Which stocks are going to be the big winners? What events would occur to drive the action? If I could predict those things, then I was sure to become rich.”
Over time, Deporre came to realize that not only was he unable to predict anything about the market very well, but no one else could either.
“There are always people that pound their chests and proudly claim that they made this incredible prescient call,” he said. “Sometimes they actually do time things perfectly, but no one can do it consistently. Most people will be correct just often enough to be fooled into thinking that it is a product of their skill and insight rather than dumb luck.”
Another problem with predictions is that they lead to inflexibility.
“Once we make a prediction, then we automatically create a bias,” Rev Shark said. “We lose some of our objectivity and will focus on the things that support our predictions and dismiss the things that don’t. No one likes to be wrong, and when you make predictions, you will likely play a number of emotional games to avoid it.”
Powerful Tool
According to Deporre, the most powerful thing you can do as a trader is to say, ‘I don’t know,’ and admit that you have absolutely no idea what the market is going to do in the months ahead.
“I may have some thoughts about what the market might do, and it can be helpful to consider various scenarios, but ultimately I just have to wait and see how events unfold,” he added. “By admitting that I don’t know what will happen, I am free to react to conditions as they change. I don’t have to struggle with the issue of being wrong. I just have to modify my behavior to deal with what is happening right now in front of my face.”
Rev Shark’s advice? Free yourself from the tyranny of pretending you can predict the future.
“You can’t and won’t do it very well, and those that say they can are fooling themselves,” he noted. “When you stop playing the prediction game, then you are free to be a much more flexible and aggressive trader that reacts to conditions as they change.”
In the end, “learning how to aggressively trade what is happening right now will make you far more money than trying to predict what might happen months or years from now.”
Get more trading strategies and investing insights from the contributors on Real Money.
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