Options Trading Red Flags: Part 1
This article, "The Social-Media Stars Who Move Markets", inspired this post and my Twitter poll responses validated my inspiration. Then there is the trend of red flag posts. It is like the universe wants me to write this.
Offering #FinTwit content? Consider this an examination of conscience.
# 1. “Look at this fancy car, purse, house, jewelry!!!!”
Their non-investment posts are excessively materialistic. The goal is to make you believe they can afford these luxuries bc their trades are so good. Not only are they making money on their viewership (NOT trades), but if that is an attractive feature to you... please examine why you are trading. Successful traders treat their portfolios like a business. Withdrawals are only made if absolutely necessary. The trade of future earnings for a Ferrari is a terrible trade
#2. “This trading strategy works EVERY TIME!”
This statement ignores changing market environments. Even if there was a magic bullet, it would be front-run. Typically, when this is advertised, they're trying to teach YOU this strategy.
It seems great that now you can do this strategy yourself, but shifts responsibility for failing onto you. Now when you lose money, it is your fault that you didn’t follow the strategy correctly.
#3. “Diamond hands!! ” “HODL!!” “YOLO BETS!”
This person trades by emotion. They will scream at the computer when they are failing, and talk hyperbolic trash when they succeed (e.g. they compare themselves favorably to Warren Buffett). This is a psychological trick (In-Group Favoritism Bias).
They align their emotions to yours & you develop a favorable opinion of them. “Diamond Hands”, “HODL”, etc. are subtle ways this manifests; these terms make you feel part of a “retail team”, but you're being taken advantage of.
#4. The #FinTwit troll
They will mock others with the intent to invalidate their point of view. This is to distract you from the fact that their OWN point of view is fallacious or incomplete.
#5. “This just happened and it’s obviously because of THIS reason.”
This is retroactive attribution. They will say something that makes sense in retrospect, but has no predictive power going forward.
Further, it is short-sighted & is not data-based. Popular financial media universally falls in this category. When you read why the market moved on popular financial media, not only is there a low chance of it being correct, but also a low chance their logic will carry forward.
#6. #FinTwit Clichés/adages in problematic context
“Sell in May and go away.”
“The market can stay irrational longer than you can stay solvent.”
“Bulls make money, bears make money, pigs get slaughtered”.
These common adages are fun, and - when taken in context - they have an element in truth in them. But that’s the problem; it is that element of truth that leads you into a false thesis.
Take, for instance, the adage that gold is an inflation hedge. Look at gold’s correlation to inflation, M2 money supply, or value of the dollar. None of it works. We should demand data or clear logic to back “given” assertions. They must answer the why, at least somewhat satisfactorily.
#7. Using past performance to validate an opinion
Many successful investors have had a successful year or call that has been publicized; that call becomes the reason all their calls will succeed going forward.
Cathy Woods. Michael Burry. They're people, too. Their theses need validation as much as anyone’s. This isn’t to say they have no insight, but validate their theses yourself. Ask why. I mention Woods & Burry because now they're being “Burry-ed”. Had to do it.
#8. #FinTwit’s Constant Apocalyptic Proclamations
There may be issues with the economy, or the financial system, etc., but a couple things need to be understood when hearing these calls.
First, they're designed to stoke fear in you, not wise investment decisions.
Second, it is in no one’s best interest for the financial system to collapse. Even a government that most don’t trust will do whatever they can to stop that from happening, even if actions just delay the inevitable. “The Big Short”, “The Smartest Guys in the Room”, and other movies are anomalies, and even somewhat glorify positioning a portfolio for economic collapse. Be careful not to fall into that trap.
#9. #FinTwit Technical analysts that claim to be both the why & what of the market
This isn't against technical analysis (TA) itself, which I think has a place in analysis. When analysts say the market is moving BECAUSE of a technical reason, that’s a sign that they have no context.
Even if correct, a rally didn’t happen because a trendline broke, a bullish engulfing candle was confirmed, we reached a fib, etc. These are signs of something else. They fail as much as succeed and need context to be an effective trading strategy.
#10. Ego-Driven #FinTwit
They repeatedly show successes and never a failure. They are unwilling to see an alternate point of view presented in comments. Even obvious errors are not taken responsibility for (like a misspelling). That means their theses aren't receptive to alternate points of view, and they cannot be considered comprehensive. These #FinTwit people may be smart, but they are also very obnoxious.
Stay tuned for part two! Let me know your thoughts in the comments.
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