Eight Trading Superstitions

Every profession has its own idiosyncratic superstitions.  In honor of tomorrow being Friday the 13th, I thought this would be a good time to discuss this topic.

Actors performing MacBeth will refer to it only as “The Scottish Play” for fear of being crushed by a stagelight.  Sailors never set foot on a boat with their left foot first.  The baseball player is perhaps the most tormented by ritual, from tapping the bat on home plate to never stepping on a foul line to the prolonged use of a lucky bat or glove way past what its condition warrants.

Traders and investors have their own set of superstitions, and these can seem every bit as silly as those we see in other walks of life.  That said, trading superstitions are very tough to let go of, even for the most logical and circumspect of market players. 

Let’s look at a few of them:

Never Sell a Stock Crossing 90 – There is a widely held belief that you never sell a stock you own as it crosses $90 per share because they almost always go straight to $100.  This concept is demonstrably specious, but I know 20-year veterans who will never be convinced otherwise.   

The Maiden Sacrifice to the Volcano – In times of market turmoil or in the midst of a heavy sell-off, many portfolio managers and investors believe that they have to blow out one position to appease the market gods, tossing a maiden into the volcano so that the island will be spared the wrath.  This thinking is as primitive as you get, but sometimes it feels good to toss out some AK Steel on a down 200 point day only to see the market rally.  If this happens once or twice, logic aside, you will swear by it.

Options Expirations/ Triple Witchings – “Never buy or sell on the third Friday of the month which is when monthly stock options expire.  And no matter what you do, stay away from everything on the four Triple Witching days of the year, when stock option, stock index options and stock indexes futures all expire together.”  obviously absurd, but deeply ingrained in many investors.

Don’t Go Back Into a Stock the Third Time – This is a variation on the old “sticking your hand in the cookie jar too many times”.  I will admit that there is some logic to the idea that something usually can’t keep working the same way forever, but some of the best traders I’ve met were guys who picked a handful of stocks, got to know the way these traded very well, and excelled at playing this short list of names over and over again.

The Man in the Box – My personal favorite and you know you do this:  “I just know that as soon as put my position on in XYZ, the Man in the Box will know it and the whole market’s gonna drop like a rock.”  We are talking about a huge amount of solipsism here, but sometimes, the timing of when you buy a stock and when a stock gets killed is too horrible to ignore.  If I ever get my hand on that Man I’ll strangle him.

Never Trade the First 30 Minutes – There is some mechanical basis to this “rule” and some daytraders especially live by this credo, but because of how active the pre-markets are these days, I personally have no problem avoiding this particular superstition.

Avoid Cutesy Ticker Symbols – This one I almost believe in.  I try not to buy shares of a company with a too-cute or trendy ticker symbol, although I will make exceptions in very rare cases.  Here are some examples from over the years: 

Brinker Restaurants:  EAT
Harley-Davidson:  HOG
Echostar TV:  DISH
Olympic Steel:  ZEUS
Sunglass Hut:  RAYS
MarketVectors Agribusiness ETF:  MOO
Solar Energy ETF:  TAN
Wind Energy ETF:  FAN
Southwest Airlines:  LUV
Majesco Games:  COOL
Boston Beer Company:  SAM
Premium Standard Farms:  PORK
Cedar Fair Amusements:  FUN

Obviously, most of these are legitimate companies, but I’ve seen plenty of bloodbaths when people have bought the tickers instead of the stocks, if you know what I mean.

No Stop Losses at Round Numbers – I’m sure something like this has happened to you:  I once bought shares of Ciena (CIEN) at 22 and put in a 10% stop loss at 20 dollars a share even.  Sure enough, the stock came in, hit 20 and took out all my stop losses.  I was left with no Ciena whatsoever as the stock ran from 20 to 200 (as I remember it).  From then on, almost all of my stop orders were placed just beneath a big fat round number (at 19.98 for example), for fear of the stock bouncing off of it and running away without me.

I’m sure there are other common superstitions out there, these are just a few that are very prevalent.  I never tell any man what to believe in the course of trading because sometimes rituals can be healthy to cling to, no matter how ridiculous they may seem to an outsider.

Happy trading!

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