While the fundamental rules of the trade are the same since Jesse Livermore, trading dynamics are going through a huge transition with wide use of internet, social networks and computerized trading. That means, as a good trader, you need to adapt. Here is a few things we can do to make use of technology and improve our trading.
Beware of stock promotion: There always was stock promotion. Used to be in the form of phone calls, regular mail etc. But now that communication is much more easier, it’s more common and effective. I’m not saying you shouldn’t buy any promoted stocks, that’s your call. But always keep an eye out for disclaimers, be fully aware that if something is being “pumped”, there is a really good chance it will be dumped at some point. Don’t believe anyone, always look for conflicts of interest in small letters. (Compensation, free shares etc)
Make use of stock promotion: Subscribe to every single free stock promotion newsletter out there. Why? Not because you want to buy what they say, but because when a stock is moving, it will help you know the reason behind it. If it’s mentioned in one of the newsletters you receive, you take it with a grain of salt. Also, 99% of these pumps end in dumps. Buying pumps is risky, but shorting dumps is lucrative and safer. Having a list of stocks that may plunge next week is certainly helpful. Finally, be aware that not all promotion is for pump&dump purposes. Some small but real companies geniunely need exposure and promotion is the way for it. Keep a clear mind and don’t completely ignore an opportunity just because it’s a promoted stock.
Twitter’s power: This is not specific to twitter, but as means of communication improve, spikes have become more common and powerful in stocks. When dealing with smallcaps, this inevitably creates artificially inflated situations where all traders rush in to buy the stock mentioned by someone. Currently it is coming to a scary point where chasing an illiquid stock frequently pays off. I don’t have the final verdict on this yet as it’s all happening too fast, but just be aware that the trading ground is changing shape and we all need to adapt. Maybe we should just accept that these are the new rules and we’ll just go along with them. I can’t yet convince myself to buy a stock just because someone and his followers are buying. But if it’s all turning into a game of musical chairs, what else to do? I adapt.
(I’m not blaming anyone or any stock community here. This is mostly happening because some of these guys are just too good. It’s inevitable.)
Careful who you follow: This may sound obvious, but I should still mention it. Everyone and their mother can now tweet. And following good traders may just be the best way to improve yourself. But just look at their trading record. Do the prices they mention almost match the realtime prices? Do they ever close a position they never tweeted an open for? Do they tweet opening a position but never tweet a close? There are way too many wannabes out there, when reality is 95% of them are losing. When in doubt, stop following.
High Frequency/Computerized Trading: You may have noticed that especially in large caps, buying breakouts or shorting breakdowns don’t just work as they did before or as it’s taught in trading books. Reason: computerized trading. When there’s a breakout, there’s a selling program to trap longs. And vice versa in the case of a breakdown. Not as much of an issue in smallcaps that big boys aren’t interested in. Won’t go into details, an amazing read about the subject can be found here: http://www.sfomag.com/article.aspx?ID=1448&issueID=c
Don’t spend too much time in message boards: Every single stock out there, even $HEB, has someone believing it’s going to explode (or plummet) next week. These guys are wrong 99% of the time. Especially if you’re a speculator type trader, reading these can make your trigger finger hesitant. There’s plethora of good information on message boards, but you should learn how to distinguish between real information and pure fluff. When you feel like what you read is tainting your vision, get out of that message board. That guy is wrong. You are right.
Research research research: It’s unbelievable how much information you can find online now. Especially when dealing with speculative companies, try to find out everything you can about them. Go to google map street view and look at their address. Does it look like a shack in the middle of nowhere? Probably not a good company to invest in. Does it have 2 employees and say they’ll be the next Microsoft? Yeah, right. Google the names of the directors. Check if the company paid anyone to pump their stock. Look at the company’s website, download their presentations, read SEC filings, check out their products for yourself. Do your homework, have the edge against other traders.
Use a realtime news service: Again, you want to immediately know why a stock is moving. Get Trade The News or Briefing so that you can judge if any move is justified or overdone. This is a skill you will gain in time. But be aware that even though these services are fast, people on the trading floor probably heard it ten minutes before you. Buying the news is one of the riskiest trades you can make.
Isolate yourself from the noise: In the end though, the problem with plethora of information is that you risk getting lost in the middle of it. Try to limit your scope, reduce number of people you follow on Twitter. Focus on few stocks at a time. You can’t catch them all, just accept it. Don’t jump from stock to stock when everything seems to be moving. As @copperstl says, there’s always another trade, another day.
Good luck.
