Stay Away From Holiday Trading

| December 21, 2011 | 0 Comments

Trading the market around the holidays is often difficult for many investors.  Too many emotions can get in the way.

At this time of year, you may find yourself making emotional trades instead of objective trades.  And make no mistake, this rarely ends well.

My advice… stay away from holiday trading all together.  It’s not a good idea to try and sneak in some last minute gains to cover your holiday shopping bills.

Believe it or not… this is a dangerous situation many traders get into during this time of year.

You see, when holiday emotions run wild, mistakes happen.  And this is exactly what can lead to irresponsible trades.

For example, an overly optimistic trader may keep throwing fresh cash into a losing trade.  When you’re feeling really good, it’s easy to ignore warning signs of trouble ahead.  I mean after all, it is holiday time and you can’t be wrong.

This type of emotional thinking often leads to throwing good money after bad.  And then, you’ve just turned one bad trade into a huge hole in your portfolio.

Clearly, you’d be better off just taking a vacation from the market.

Now, we all know that no matter how hard you try, there’s no stopping your emotions.  So, if you must trade around the holidays, I have a few pieces of advice for you.

The question is… if you must trade, what can you do to check your holiday emotions at the door?

The simple answer is to develop a thought process that can improve your ability to look at the market more objectively.  To help you get started, I’m going to share a few techniques I’ve developed over ten years of professional trading.

Let’s get started…

First off, stick to your trading discipline.  When you buy a stock, make sure you set your stop.  When the stop triggers, close your position.  If you don’t follow your discipline, especially around the holidays, you might as well kiss your money good bye.

Another effective technique is to sincerely challenge your reasons for a trade.

Here’s a recent example…

On Monday, we saw the market plummet into the close with the Dow slipping by 120 points.  With the looming European debt crisis, many traders saw this as an opportunity to go short the market into year’s end.

So, what did they do?  A good number of traders bought the ProShares Short S&P500 (SH).

Imagine how surprised they were when they saw the market rally hard on Tuesday morning without any reprieve.

However, using my technique moving forward, what you want to do is come up with solid reasons that your trade is right.

So, what you want to assume, just for now, is the market is smarter than you are!

You need to go out and try to make the market’s case for a continued selloff.  For example… is the housing market really improving, is GDP starting to increase, and is employment getting better?

Trying to prove the case that’s opposite from your own instinct is a great way to find what you might have missed.  A little perspective can make a big difference.

Lastly, don’t be afraid to look at other markets.

I look at the Dow, the S&P, and even the NASDAQ.  By doing this, I can make certain my trade fits my thesis.  In this case… I need to see if all of the markets are declining without something else going on.

For example… if the VIX is down and Treasury yields are up, it could simply suggest a technical move.  In other words, bearish mentality can still easily be permeating through the markets, leaving our selloff thesis intact.

These are only a few techniques that I use, especially around the holidays.  These techniques are a vital part of staying grounded.

If you can’t seem to just stay away from the stock market during the holidays, don’t forget that the worst thing you can do is allow your emotions to get the best of your trading.

There’s no doubt about it… you don’t want a last minute drop in your portfolio value for the holidays.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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