Along with seemingly every other human being on planet Earth, I journeyed to my local theater to view the hotly anticipated and epically hyped new Star Wars film over the weekend. Okay, I’ll admit it, I went twice. And I loved every minute of it. Except when Finn sawed-off (redacted) and when Rey went ape- (redacted) and that one scene when the Millennium Falcon (redacted). And don’t get me started on Leia’s (redacted).
What? You think I’d be mean enough to share spoilers? I can think of nothing more evil than divulging secrets that some have waited decades to know.
No sir. No spoilers here so if you haven’t seen it yet don’t worry.
On to the purpose of today’s musings: I was pleased to find a few parallels between Episode VII and the trading universe. Allow me to share my top two.
The anticipation of something is almost always greater than the reality
The buildup to the release of Star Wars was insane. The marketing machine at Disney was firing on all cylinder to rile up the masses with anticipation. And the efforts weren’t in vain. “The Force Awakens” has unsurprisingly smashed box office records left and right.
But here’s the thing. I’m not sure if the movie created as much excitement for me as the anticipation of it. This is a phenomenon that occurs in stock prices all the time. Perhaps you’ve heard the following phrase, or some variation of it, before:
“The expectation of an event creates a much deeper impression on the exchange than the event itself.”
Jose de la Vega, 1688 —
In trader speak we often say, “buy the rumor, sell the news.” The success of said phrase is due to Jose de la Vega’s observation. Think of the market’s muted reaction to the much anticipated rate hike last week. Or, better yet, take a look at the action in Disney stock Friday and today. It’s experiencing the ultimate sell the news reaction to the movie release.
Side note: my favorite trade idea for DIS stock here is to use the bump in implied volatility to sell iron condors or wait for the stock to become more oversold and sell bull put spreads.
More questions than answers
While “The Force Awakens” divulged much about the aftermath of the Emperor’s and Vader’s demise, I left with sooo many new questions. Curse J.J. Abrams for being so cryptic on some things! He left enough threads for dozens of future movies to pick up on. And, unfortunately, we’ll have to wait two years for some answers.
In a similar vein, traders of all stripes face countless questions every day. The market gods, like J.J. are reticent to reveal darn near anything about the future. Not know what’s going to happen is the sucky part of trading. But, it’s the nature of the beast and you have to come to terms with it.
How?
Well, first, stop searching for certainty. It doesn’t exist for traders. I’m specifically talking about certainty in forecasting. Nobody knows nothing about da future.
Am I exaggerating? Maybe a little. Second, focus on your process, your edge. You do have one, right? Focus on what you can control not on what you can’t.
And finally, master position sizing. It’s what saves you when the answers are finally unveiled and you realize they’re a far cry from what you predicted.
May the Force be with You.
Financial freedom is a journey
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