Why You Avoid Simple Trading Ideas
“We have an options trade author that does the same trade, on the same stock, almost every week, and makes very consistent money. But, I can’t sell that to readers.”
I ghost write for a couple of online stock publications. Sometimes it’s the paid content, sometimes the marketing material.
As part of that gig I talk to management at the publications. We sift through ideas, come up with interesting articles, and find keywords to get clicks.
So, part of the writing is marketing and part of it is investment or trading ideas.
It was in a conversation with one of the business development guys I work with from a stock picking newsletter that he made the statement above.
He can’t make money selling a boring, consistent rinse and repeat strategy because:
- It’s not new
- It’s not sexy
- It’s too easy, and
- Maybe it’s tough to come up with a cool moniker, “The Never Before Seen Way to Retire at Age 22…Buy Here, Sell There, Strategy”???
“Simple” and “Easy” Aren’t 4 Letter Words (well, one is)
Why is a simple, easy strategy for making money trading so hard to sell to people? Why not happily execute that trade over and over and over?
My goal when I trade, whether it’s stocks, warrants, or options, is to make money in the easiest, least stressful way possible.
I want my life’s adventures to be in travelling to new destinations, eating new foods, trying fine wines and whiskeys…but, adventurous trading, don’t sign me up, I’m out.
So why do people shun simple, easy trading for exotic, never been tried before, fly by the seat of your pants trading?
I have a couple of theories, one I’ve tested, the other I have evidence for which you can judge for yourself.
My two theories focus on warrant trading, since that’s my jam, but they definitely aren’t exclusive to the warrant realm.
They (Whoever “They” Is) MUST Know
First, the tested one. A simple, easy strategy doesn’t work, because if it’s that simple and easy everyone knows about it, which causes the strategy to stop working. Stick with me.
Let me explain the reasoning using a simple seasonality pattern. This isn’t a warrant pattern, but the idea behind trading patterns is the same.
If I know that toy companies stocks, I mean, if I know that electronic gaming companies stocks, go up every December because of the holidays, guess what. I’m going to buy those suckers in November.
Then some Money, or Forbes, or Yahoo Finance dude writes about this strategy and the next year everyone buys in October. Aha, we’re getting in ahead of the November buyers.
The next year buyers drive the stocks up in September and by December they aren’t going up at all but actually falling. Not too complicated. AND, strategy destroyed.
It’s the, If everyone knows about it, it messes it up, Rule.
It’s kinda like when Starbucks announces their free holiday refill cup and everyone buys it ahead of me, and then sells it on Ebay for $20.
Everyone knows what’s going to happen (it’s going to sell out), so it messes it up for those of us that go to Starbucks at a decent hour of the day, say 10:30 a.m.
Note: I tested this rule by telling some of my really smart friends about simple, easy ways to make money trading warrants. Patterns that repeat over and over. Each of them responded with some version of the above rule. None of them traded the simple, easy strategies. None of them made any simple, easy money.
A Little Knowledge is a Bad Thing…But NO Knowledge is Even Better (for me that is)
The second reason is best illustrated by a post I saw recently on a trading forum, and the reply. I blurred the name because I’m not trying to make fun of any one individual trader, just traders in general.
(AND, the guy did link to my site further down in the thread. Which clearly shows that I do a horrible job of explaining what warrants are through my site if this is what he took from it. Oh the shame!)
I want to put the reply he got back right here, but first a few points. And, then the reply he got.
- Many (a few hundred or so at any given time) warrants are traded on exchanges like the Nasdaq and NYSE. They trade just like stocks, and like stocks on most platforms are now FREE to trade, unlike options. (Although my son tells me that Robinhood isn’t supporting warrant trading…c’mon guys, get in the game.)
- This guy or gal has a lot of posts and a lot of likes, talks about LEAPs (another trading vehicle that many people don’t know about) and seems generally knowledgeable. I’m going to assume they are fairly trading savvy, BUT still don’t know about warrants and how to trade them.
- Very few people traded warrants 20 years ago when I started, and very few people do now. Fewer traders = less competition and more opportunity for those in the know.
And now for the reply, from yet another poster who has lots of comments and likes, so, I assume is fairly knowledgeable.
This comment made me feel young and alive, like I was in the 1980’s!
Well, it made me feel older than most traders, and that my advantage in trading simple, easy warrant set ups is getting bigger. Even better.
This one I call the I’m sooooo busy trying new, exciting, sexy trading things that I don’t have time to learn the stuff that has worked just fine for over 20 years, Rule.
And yes, my studious reader, I see the logic conundrum here. I’m sure you do too, right?
So, my first rule for people ignoring simple, easy warrant trades is that everyone knows about it (remember, a lot of my really smart friends told me this).
And, the second rule is that no one knows about it. (And, believe me, not many people know about it, even if my really smart friends say everyone must.)
Any geometry teachers in the house? Want to run the proof on this? Everyone knows, yet no one knows…very Yoda.
But, more importantly than the geometry proof…what is the result of everyone thinking everyone else must know about these simple, easy trades, and no one actually knowing.
The simple, easy patterns continue to repeat. In other words, no one is yet buying the gaming companies in September.
Heck, in warrant trading patterns you rarely see the equivalent of buying in November, even though there are gains to be had every December.
I Guess There’s a Reason for Tim Ferris Sayings
Now, you might think that this concept of not doing the simple, easy thing is unique to trading.
But, apparently not.
Why else would Everything Guru Tim Ferriss have to come up with this saying?
What would it look like if it were simple?
Tim Ferriss, Everything Guru
Tim uses the phrase when he’s looking at a company to invest in, or to start any project. I think it’s a great approach, and I highly recommend you apply it to your trading, if you aren’t already.
You’ll have less stress, AND make more money. Don’t be someone who can’t do simple.
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