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How Social Media is Transforming the Trading World

Learning how to trade is difficult. It has always been. Nothing can replace the time you need to spend to develop your understanding and procedural memory; there is not a substitute for the right attitude, mentors and experience.  What makes the learning process different today is called social media; the existence of vertical social networks that provide the tools to shorten your learning curve, make the journey more enjoyable and safer if you will.

Let’s assume that you love basketball and you would like to play in NBA one day. Imagine you had access to Kobe Bryant and Michael Jordan. How amazing it would be if you could ask them questions and train along them every day. How much faster you would develop your skills. Imagine if Kobe and Michael could’ve trained together. How much better each of them would’ve become. This is what StockTwits has done for traders and investors.

You don’t need to wear a suit or talk on CNBC to be respected on ST. You just need to show up every day and share. StockTwits believes in meritocracy. As American idol promotes the most talented singers that nobody has heard of, StockTwits shines the spotlight on real market pros many of whose names are not widely known – yet. People are voting every day by following and re-tweeting.

In an attempt to promote excellence, StockTwits organized a crowd-sourced book by inviting some of the most renowned traders and investors in the financial web to share in specific details how they approach the market every day. This is a very practical book, filled with over 40 actionable setups. Each contributor walks you step by step through his/her decision making process. – from searching for new ideas, to executing, managing risk and closing a position, so you could repeat it later yourself. Expect more details soon.

 

Coming July 5th

 

Why Everyone Should Learn How to Trade/Invest

I honestly respect James Altucher and believe he has a brilliant mind, but I absolutely disagree with his post on “10 Reasons You Should Never Own Stocks Again“. His reasons basically revolve around the difficulty of achieving significant returns consistently; the harsh competition, the unethical behavior, the luck factor.

1. Learning how to trade/invest is difficult, but so is everything else. Every discipline has its learning curve. Lawyers go to school for 8 years, before they are considered ready to prove themselves. I haven’t heard of someone, who considers himself a good doctor after reading a few posts on the Internet. If you try a surgical operation after reading a book or watching a Youtube video, I can tell you that most likely you will be unsuccessful. Trading/Investing is not different. It takes time, discipline, the proper teachers, the right attitude. Most people fail in trading/investing, not because it is particularly hard, but because they are not properly prepared.

2. You don’t compete against other traders and investors. You compete against yourself; therefore there is no limit to what you can achieve.

3. James believes that everyone will be better off by investing in themselves. I absolutely agree. Acquiring a new skill is investing in yourself. Trading, as everything else in the world is an acquired skill. By learning how to properly trade/invest, you are investing in yourself.

4. James says that luck is a huge factor in the stock market. Luck might be the main factor behind one or two gains, but over time the single most important factor for consistent gains in the stock market is risk management. It has nothing to do with luck.

5. James states that the best investors average only 10-15% a year. Who are considered the best? Usually the ones that manage the most money and have long track record of consistent double digit profits. The size of the managed capital is an obstacle for the performance. It is much easier to achieve 20% on $100k than 20% on $10 billion. Besides that, most of those investors manage other people’s money; therefore their personal return is much higher than 10-15%. Investing doesn’t have to be a full-time job.

6. The odds are that you won’t become a trading or investing superstar. I agree. Not everyone will become one, but this is not different than in any other discipline. There are only a handful of great football and piano players, but also a much bigger majority that is making a good living out of it.

7. Yes, there is unethical behavior among investment banks and the board of the companies, but we should not make general conclusions based on a few famous cases that made it to the press. The media pays attention to the negative, because this is what sells best. This is why it focuses on the Enron’s of the world. The stories with good endings are rarely told. It is not a coincidence that the term “good news” has become an oxymoron.

8. James says that stocks are boring. Talk for yourself, James. We all like different things.

I have much more to say on the subject, but I will keep it for another post.

LinkedIn and the Implications of Buying on the IPO Day

The success of the $LNKD IPO has just changed the exit strategy for all social media companies that are still private. The combination of small float and being the first U.S. based direct play of the social media trend produced wonders.

If you are a short-term trader, it does not matter if you use the service or if you understand it. All it matters is the volatility and the huge range that hot IPOs typically provide. $LNKD provided multiple opportunities for intraday traders and you didn’t have to buy blindly at the open to profit, on both the long and the short side. The stock built several high-probability intra-day bases with clear stop levels.

For swing-traders and investors, historically it hasn’t been a good idea to buy on the first day of the IPO. Most stocks perform poorly in the first six months after their IPO as underwriters and early buyers sell to lock in profits and mitigate risk. Even some of the biggest stock market winners in the past 7 years, struggled in the first few weeks after their IPO. Then they formed a base and broke out to a new high. You don’t have to chase by buying on the first day. Wait for the stock to establish clear zone of support and resistance; wait for it to prove itself by making a new high.

Take a look at the after IPO price action of $GOOG, $CMG and $OPEN.

 

 

 

No matter the story behind the IPO, it is never enough to sustain a long-term trend. A company needs to deliver a number of consecutive catalysts to sustain the expectations and fuel the price growth. At least this was the case with many of the biggest stock market winners – $GOOG, $CMG, $OPEN.

At the end of the day, catalysts drive stock prices. For the different time frames, different catalysts matter. Short-term price trends are fueled by momentum, medium-term price trends are fed by earnings related catalysts, long-term price trends are sustained by social and business trends. When it comes to a day to day price action, valuation is irrelevant. Traders don’t care about valuation. They just care about risk to reward and momentum.