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10 Trading Downsides of Social Media
10/03/2013 6:00 am EST
With the permeation of social media into what seems like every crevice of our lives, Charles Kirk of The Kirk Report lists ten tips to be aware of when sharing your trades.
Recently we talked about the challenges related to shadow trading—i.e. the practice of making the same trades or just watching someone else more experienced as a path to learning how to better trade or invest. Today let’s take a look at the other side—should you share the trades you make with others on social media or otherwise?
First, to be fair, let’s review the potential benefits before we review the challenges. Some of the those benefits I can think of is that you can receive further feedback on your trades beyond its performance—i.e. others can play the devil’s advocate so you understand the other side of the trade. Sharing trades can also help teach you to be held accountable to others regarding what you say and do in the markets. By sharing you can also often learn new things, new techniques, new methods, identify potential catalysts you didn’t know, and you can also get sentiment reading behind any particular idea especially if you utilize value-focus or contrarian-based strategies. At times, you can also find others will offer some special insight that may also lead to other good trades. Finally, being social may also help overcome feelings of isolation and loneliness that most individual investors and traders routinely feel.
So, what’s the downside from sharing your trades? Here are a few things you need to be aware of if you do this:
Sharing Will Drive You Toward Ego-Based Trading & Investing: By sharing trades, you will put your ego on the line. You will be forced to defend a trade and in doing so, will increase the level of emotion you have connected with that trade. This is not a good idea. You want to trade in a way where you can take or leave it trade at any moment especially when it moves against you and your original thesis is proven wrong by the market. Bringing your ego into the trade will only make it that much more difficult to change your mind and to own up to a mistake you have made. It will also often prevent you from viewing any trade with any level of consistent objectivity.
Sharing Will Only Encourage Analysis Paralysis: All strategies will require making tough and unpopular decisions at times. The last thing you need is someone to tell you that you are wrong or to question what your research, analysis, and strategy clearly suggests you to do. Sharing trades only increases the temptation to question, if not abandon, your strategy when the pressure is on and at the worst of times. Not to mention that the best trades you will ever make will often been seen at the time as clearly wrong by the vast majority. So if you are constantly looking for others to agree with you as confirmation to your bias and strategy and only take those trades, you’ll not be trading your strategy but rather your own bias and, even worse, the bias of others instead.
Sharing Will Encourage Too Aggressive Risk Taking: If you follow any traders on social media, you would think they are making millions and never experience a losing trade. The truth is that very few really are making that kind of money, and those that are, aren’t sharing what they do with anyone on Facebook, Twitter, or StockTwits. The best traders I know don’t have time or even the slightest inclination to share their trades with others. After all—in a zero sum game—why would help another trader do what you do and not put the same amount of time, work and effort in? Screw that Jack! Unfortunately, what happens for many, especially new traders, is that they think everyone is making big money especially by making very risky trades. You’ll always hear about the great trades, but never about those which the trader has lost big on. Feeling like everyone is killing it in all market conditions can drive you to trading too aggressively and trade far too much that will only drain your capital. Social media doesn’t exactly encourage people to talk about risk management as that impresses no one except those who really understand what this game is all about.
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Sharing Will Naturally Promote Herding Mentality & Trading: If you want to underperform like the herd, then think and read everything just like the herd. Social media and sharing trades promotes heading mentality and strategies and we all know that is the recipe for long-term under performance. No one wants to be proven stupid, even though some of the trades that seem the stupidest can also be the most profitable. Just look at this year’s stock and sector winners for countless examples of that common tendency that what people thought were wrong trades at the beginning of the year have been anything but wrong.
Sharing Will Increase Your Trading Activity: If you share trades, you will put yourself in the position of having more and more great ideas to share every single day to keep your growing fellowship happy. This is simply not realistic or even possible. What will happen is that you’ll always be searching for the next hot trade and increasing your trading activity as you do so instead of being selectively focused and frankly out of the market at times when nothing decent turns up. Remember, you have nothing to prove to anyone other than yourself. We all work at this at our own pace and therefore the worst thing you can do is to allow others to shake your confidence and interject unhelpful stuff that will take your focus away from developing your own strategy and focusing yourself and your capital only on the best of trades.
Sharing Can Often Be a Waste of Your Time, Energy, & Focus: All of us only have so many hours of the day to dedicate to the markets and our portfolios. If you have plenty to spare, then perhaps sharing trades is a good way to waste some of your free time. I personally don’t have any time to waste, but you may be different. That said, show me a trader who is out there defending and promoting their trades to show others how smart they are and I will show you someone who is set to blow themselves up and anyone who follows them. If these folks just focused all of that time and effort on making better trades and improving their own strategy (and those who follow them), they would be so much better off. Many trade and share for the wrong reasons—not to make money—but to become famous (i.e. in the land of the blind, the one-eyed man is king). Mr. Market always figures out a way to humble these folks sooner or later and all of those who follow their lead.
Sharing Promotes Opinion-Based Strategies Which Are Faulty and Inconsistent: Your bank account doesn’t reflect what opinions have been right, but how much money you’ve made when you’re right and how little you have lost when you are wrong. What others think about your trades/investments doesn’t really matter. Ideally, you want to trade and focus on your own strategy, not what others think, which are going to be just as right and wrong as you are. At the end of the day, the only thing that matters is performance, not opinions. I personally don’t give a rat’s ass what anyone thinks about what trades I make—at the end of the day, I only care about sticking to strategy and growing my portfolio. This is exactly the same kind of no BS mindset you should try to adopt as your own.
Sharing Won’t Really Help Others: Say you are one heck of a trader and you’ve developed a strategy that really works and from the kindness of your heart you really want to share the benefits from others in doing go in order to help others. Good for you! I’ve been there. So, what the problem? No matter how clear and helpful you may be, most people don’t listen or follow your advice closely or even consistently. They’ll selective cherry pick what you say only when they agree, which in turn, will produce much different results than you. They also won’t sell when you sell, they won’t buy when you buy, and therefore whatever you say won’t really be truly helpful to them. In addition, any great trades you share, they’ll take full credit for it, while at the same time any bad trades you share, they’ll blame you. If they do blindly follow every trade (like through the new auto trade services) they also will be the first to leave when your performance sees any decline as they’ll move onto the next hot strategy and trader to chase. Why play that game and add to what is already a challenging way to make a living?
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Sharing Won’t Make You Any Happier: Some recent studies concerning social media have shown that being social online has more often than not increases rather than diminishes feelings of isolation and loneliness. You have to ask yourself if the time you devote to social media has contributed to positive or negative feelings. For most, the negatives clearly outweigh the positives in this regard. The online world is a rough and tough world—people will say things to you on social media that they would never do in person. We all have experienced this online in some form. Over the years, I have been harassed on social media, my life and family have been threatened more times than I can recall, and at the end of the day, none of that was very beneficial to me other than serving as some additional motivation for me to keep working hard and staying focused on both meeting and exceeding my personal trading goals. The way to be more social is to get out there in the real world and contribute something positive through your time and hard work beyond your trading. Social media can be fun and helpful at times, but unfortunately, it can also be a source of great pain, frustration and worry.
Sharing Not Proven to Help Performance: If being social and sharing trades is so helpful, then why are so many investors under performing and not getting any better in recent years? We have had social media in trading and investing for well over a decade, yet, the few studies that have been done to review individual investor performance shows that individual investors are still under performing as much, or even more so, before social media began. This is a classic example of how technology, as wonderful as we think it is, at the end of the day doesn’t really solve the problems we think it does and, in fact, creates new ones. Yes, all of us know a lot more and can share more, all of the time from anywhere we are, but that doesn’t mean that we are better off for doing so or that our portfolios are any better as a result. So, be careful what you share on social media and do so only for the right reasons. If you feel like you want to help others, then look for ways not to share your trades, but instead the techniques you use to produce those returns. That is what is truly needed within the social investing and trading.
I could go on and on, but these are the main points I wanted to make. As all traders, we must constantly evaluate what we do to figure out if it is being helpful or not to not only ourselves but also to others. If you find sharing your trades on social media helpful to you and those who follow you, then by all means continue doing so while at least aware of the issues I’ve outlined. I know they have more often than not had a negative impact on many who I have mentored not to mention that I have also experienced many of the same issues previously.
If you don’t know if sharing on social media has had any negative impact on you, the best way to find out is to be brave and stop doing it for a period of time (I say six months to a year minimum) and see what happens. You may be hurting yourself more than you even realize and only you can figure out if these issues are having any negative impact on you and your performance.
By Charles Kirk, Trader and Blogger, The Kirk Report