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Notes from a Newbie: Never Swim With Sharks

July 29, 2018

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Hey traders, welcome back for another edition of Notes from a Newbie.  Well its that time of the year again, the time when amateur traders gamble away their hopes and dreams for a small shot at a big payday.  The time that can humble the best of traders and wreck the worst of them.  That’s right its EARNINGS time! But this time, unlike the last earnings season is a lot different for me.  See there was a time not that long ago that I, probably like some of you, made the decision to either willingly or unknowingly hold trades into earnings. (See blog “X marks the spot”) As traders we live or die by establishing and following rules and from my experience most of those rules are either gifted to us by our coaches and mentors or learned through our past mistakes.  So as a good trader does I vowed to never trade earnings in a live account until I had the knowledge and experience to do so.  So, this earnings season I decided to take a different approach.  I ensured all my positions closed or will close prior to earnings and am currently sitting with 70% of my portfolio in cash. This was an idea that I would have never entertained a 3 months ago.  See as a new trader coming into my third earnings season I believe there is just as much value in not trading earnings as there is by trading it.  What value is that you might ask?

Well for one it has allowed me to observe the behaviors of the market indices and specific stocks within them without having an emotional attachment to what they are doing.  I have learned that the volatility surrounding earnings also correlates with my emotional level.  Stress can often lead to tunnel vision, so alleviating the stress has allowed me to expand my situational awareness and have a better understanding of what is going on in the markets.

It has also allowed me to study analyst earnings projections and then watch how right or mostly wrong they were.  It has taught me to form my own opinion based on the pillars of fundamental and technical analysis just as we were taught and to take the “professionals projections and opinions” for what they are worth.  Ask JP Morgan who rated Twitter as top pick heading into earnings only to watch the stock drop 20% on earnings.  And we won’t even discuss Facebook.

It has allowed me to focus on practicing different strategies in my paper account to see what works and what doesn’t as well as management techniques when things go against me.  It has provided me an opportunity to be wrong and be ok with it.  Learn from it and place another trade without destroying my portfolio in the process.  So that one day I can take advantage of the volatility instead of running from it.

It has allowed me to focus on finding trading opportunities due to overreactions or underreactions to earnings reports. There is no doubt that earnings season provides opportunity, for me it has been a lot cheaper to find them once volatility declines.  No one needs the stress of being wrong and waking up to a 10% gap when you could have waited for the right set-up and a better probability.  50-50 on a large gap is not a risk I am willing to take, not anymore.

Most importantly it has provided a low stress, low cost, positive learning environment.  And that will make me a far better trader than speculating and losing.  Playing not to lose instead of playing to win hasn’t let me down yet! 

Needless to say, my experience this earnings season has been like drinking Pina Coladas in Margaritaville without a care in the world instead of swimming with Great White sharks while wearing a seal suit off the coast of S. Africa (sorry been watching a lot of shark week).   The moral of the story, if you are a new trader NEVER SWIM WITH SHARKS WEARING A SEAL SUIT! But if you insist I will be watching from the beach with a drink in hand! Good luck and see you all next week!


One Reply to “Notes from a Newbie: Never Swim With Sharks”

  1. Tyler Craig says:

    Great stuff, Randal. Good reminders for all of us.

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