Traders Edge Blog

Monster’s Perspective:
Avoiding ‘Amateur Hour’

By Jon “DRJ” Najarian

Pete and I frequently speak of “Amateur Hour,” the first 60 minutes of every trading day. Some hear us mention this and take offense, as if we are making fun of retail investors. Nothing could be further from the truth.

The two of us founded our brokerage tradeMONSTER to help individual investors by providing them with as many understandable and accessible tools as possible. We also offered commissions at the most economical level in the industry because we understood that the more someone trades, the more commissions can be a drag on performance.

So what is Amateur Hour, and why do so many professionals focus on it?

We all know the line from the Robert Burns poem “To a Mouse,” in which he writes: “The best laid schemes of mice and men often go awry.” This is particularly true in trading.

We do extensive research and draw our plans carefully, including entry and exit prices for either profit or loss. But then a guest on CNBC comes on an hour before the market opens and makes the case for the polar opposite of the strategy you have so dutifully laid out. Next thing you know, stocks are opening in negative territory.

Instead of sticking with your plan, keeping your hand steady on the tiller, you are suddenly driven by the winds towards the rocks. And instead of reassuring yourself that your strategy remains intact and you are getting in at a better price, you are paralyzed. Or, worse yet, you flip 180 degrees and go with the wind, thinking that this is “trend following.”

In other words, you just threw away several hours or even days of prep work to chase the market up or down in those first few minutes of trade. The S&P opens down 10 “handles,” or points, and instead of buying according to your painstakingly formulated thesis, you sell. Or, conversely, the Dow runs up 60 or 90 points and you jump in despite having an extremely negative outlook based on the belief that the market was overvalued.

Both are great examples of why professional investors call this Amateur Hour.

Yesterday (May 29th) was a great example of Amateur Hour, as the panic over their Cystic Fibrosis drug pushed shares to the lows of the day in those first 60 minutes, and then shares bounced once the panic subsided. Thus, as we wrote ahead of the open, if you get that flush, don’t be the chump that sells, but if your have the stomach and bullets, use the drop as an opportunity. Those that bought shares of VRTX at or below $50 and took $8 faster than you can say FAST MONEY, and those that followed that Amateur Hour trend just gave their money away. At least in Vegas they buy you drinks!

 

What you should do instead is stick with your conviction. Whether it’s an earnings announcement, a new product, an FDA drug approval, or some other catalyst, don’t abandon your strategy; don’t take that first hour as the trend, but rather as the fade.

Why complicate the markets? The old phrase “Keep it Simple Stupid” is as true today as it has ever been. You needn’t take the path that too many struggle to follow, as maintaining focus can improve your returns and ease your mind.

Along those lines, many investors allow themselves to get overwhelmed with data that has become so easily obtained on the Internet. We’ve never had so many informed investors, trading with narrow bid/offer spreads and nearly free commissions, struggle so mightily to make a profit.

My friend Dave Landry, a market technician from New Orleans and a published author, gave me a copy of his most recent book–all three pages of it. The simplicity of its message proved irresistible at a recent conference we spoke at in Italy.

The first page showed the uptrend, in which the chart rises from the lower left to the upper right. That was followed by the bearish chart that runs from upper left to lower right. The last page showed at flat line representing sideways markets.

When you and I are trading any of these three scenarios, we need to remain focused on which market we are in and ride that trend. But keep in mind that Amateur Hour isn’t the trend–it is rather the reaction to trading in Asia and Europe. That first hour is playing catch-up to markets that were open when ours were closed.

Of course, any of you who have traded for any length of time know that it’s not quite that easy. The market can be in a downtrend, but just try to ride out those short-covering rallies and you’ll see how easily you can be shaken out of your conviction.

So your choices are simple. You either need to trade full-time–which means getting in and out of dozens or hundreds of positions each day as I do–or you can establish call spreads or put spreads that are less susceptible to short-term moves against the trend you are following.

This is precisely how option strategies can help you maintain your objective outlook rather than getting pulled in every direction on a given stock or ETF.

Jon ‘DRJ’ Najarian is co-founder of optionMONSTER® and co-lead analyst for the InsideOptions™ trade idea alert systems. He spent the first 29 years of his trading career trading in and around the pits of the Chicago exchanges. Jon is a frequent contributor to CNBC, the Wall Street Journal, and other prominent financial media organizations. Mr. Najarian also co-developed the patented trading algorithm the Heat Seeker®, used to detect unusual trading activity.

Musings from the Editor:
The Trading Mindset

“The Trading Mindset”

If only I knew then what I know now. How many of us have uttered those words? Yes, there is much to be said about hindsight… Funny things is, you perceived what you knew previously as correct—it was your reality then. No worries, with some mileage under your belt what you now know is surely correct, right?

Hmmmm… Well, that’s no doubt your perception…for now.

Kidding aside, when it comes to trading, one of the biggest challenges is that of working through misperceptions to determine what is real and that which is not. Be you a relative newbie or someone who’s logged myriad hours dissecting charts, tis safe to say your perception of what trading is and entails has changed and is probably evolving still.

Whether you’ve come to realize it yet, the ultimate challenge is getting to a point where you can become profitable while maintaining your marbles—those precious few rolling round in your noggin.

Yeah, I know it sounds simplistic. Here’s the rub—it ain’t so easy, as you’ve surely surmised. Yet it is key to lasting in this biz…for that matter even maintaining a desire to do so. For most people, it’s an ongoing issue because they fail to heed warning about the significance of psychology in trading and the necessity of developing a professional mindset.

Well, while that all sounds negative, the fact is that it shouldn’t. Who hasn’t heard that trading can be pretty tough? Not like I’m breaking news here. The good news is I’m not talking about learning rocket science or trekking to Tibet to gain some special consciousness in order to succeed. If you’re reading this then you have the ability and are already one step ahead of most because you’re obviously spending time and effort seeking insight. Developing the correct mindset is really all about making it a priority—plain and simple!

False Perceptions

One of the most difficult perceptions to shake for many traders is that of the notion that trading is very much like war and that each day you go into battle. Such analogies get bandied about constantly, perpetuating the perception of the warrior trader.

Another you’ve surely heard is that disciplined traders have nerves of steel, ice water in their veins and are about as emotional as robots…very much in the image of a James Bond character liberating all enemies of their money and taking no prisoners in the process.

Wow, how cool are those guys! Who wouldn’t want to kick butt and take names each day—
fattening the wallet all the while.

The Real Deal

Fair enough, trading can feel like war at times, but approaching each day and position like
you’re taking on the world is mentally exhausting and impossible to do effectively or profitable over time. Same holds true for trading by the seat of your pants and relying on your willpower, steely nerves and ability to beat others at chicken.

I say this from experience, having watched myriad trader wannabes follow this doomed path over the years. I myself almost ended up there as well. Sparing you many of the details, roughly fourteen years ago I was trading a sizable position in a well-known tobacco company one Friday afternoon. I was doing quite well…right up until trading was stopped. A surprise verdict (turns out not so much of a surprise for some…Doh!) for a second-hand smoke lawsuit (which had been expected the following week) suddenly materialized.

I managed to break almost every one of my trade management rules in the course of a relatively short period of time thereafter. After what seemed an eternity (certainly longer than a smoke break), trading reopened with the stock bid down a good clip. After a brief bounce, it went into what felt like freefall. Long and short, luck shone on me and catching a dead-cat retracement bounce, I managed to nearly halve what was a huge loss. Unfortunately, what I was left with was a still a quite sizable high-end, five-figure loss.

I can still remember the trader sitting next to me being excited and saying something to the effect of “What a ride,” and congratulating me for having the discipline to get a good chunk back.

Some discipline, huh?

Funny thing is that I even congratulated myself and felt exhilarated for a short bit of time
thereafter. Then reality set in and the weight of my comeuppance started to take hold. I ended up in the bathroom sick to my stomach. To label it a surreal experience doesn’t do it justice.

Gut Check

Frankly, I had lost good-sized pieces many a time previous and had never really batted an eye. It certainly never rattled me for more than a short period and I never really considered the fact I could get taken out…or would be reckless enough to put the gun in my own mouth.

While I’ve joked about it often since that time, it was not so then and in fact I literally had a gut check over that weekend and the following week. Although I had been in the business for a decade before going off on my own, I found myself wondering if I could trade on my own for a living…and wondered if I could handle the emotional turmoil, such as I had just experienced. I actually didn’t trade for a couple weeks while I worked to get my head back on straight.

It was during that period that I did something very smart. I decided to get back to the simple and straightforward approach and to examine each element of my strategy for trading—soup to nuts, as it were. What I realized was that I had actually always relied on my technical and tactical experience, (which was thankfully pretty good), but that in truth I had been long neglecting what I knew to be a critical element.

Despite having learned about it much earlier, I hadn’t devoted the time to developing a mindset that enabled one to trade with clarity of mind and without anxiety or fear. Doing so had left me vulnerable and when least expected nearly caused me to wash out—a bitter pill to swallow, given that I knew better… or at least thought I did.

Core Element

Turns out that was a great lesson for me. I actually went back to the drawing board, studying old trade journals and rereading a ton of books on all aspects of trading. One of the most important that I reread was “The Disciplined Trader” by Mark Douglas, an industry standard on psychology and trading. Doing so helped remind me that discipline in trading is unique and not at all about fighting battles, keeping our nerve, facing down an opponent or winning through sheer force of will. In fact, that approach is a prescription for lunacy. It will wear you down, break your spirit and appetite for trading… and eventually break your bank.

I’ve continued to benefit as I’ve made it a habit to study that area ever since. It’s kept me
focused and in the game. A few of the core elements that I incorporated into my mindset at that time and that have continued to serve me well since include the following:

  • Create a simple set of cash management and trade management rules and adhere to them—period.
  • Implement simple strategies for a given situation and then trust them…play the probabilities they’re built on leveraging and seek to maximize the statistical edge or advantage they are capable of delivering.
  • Trade with the understanding that no single trade can break you, make you rich or define you. Every trade is but that—a single trade. Just like the shopkeeper selling simple items one at a time. Some make more money and some less or even cost you. But cumulatively they add up and get you where you want to go.
  • Never vest yourself in a trade. It’s never about being smart or right. A trade either works or doesn’t and the reason for the outcome matters not. Whether it returns a profit or loss, simply move forward to the next trade. Once again, the shopkeeper mentality—you don’t celebrate or mourn an individual sales transaction such as selling a mop or a Snickers bar, you simply move on to the next sale.

Liberating Approach

I can tell you with full confidence that trading with such a mindset is extremely easy and stress free. It’s liberating because it takes fear and anxiety out of any given trade and the trade process in general. It allows you to trust and trade your system. You find that you’re not afraid of losing ground on profitable positions, so you stay out of that trap of selling winners too early. On the flipside, you have no problem embracing a loss quickly and without question. Finally, it gives you clarity—it allows you to perceive what is really happening in the market at any given time versus what you need or want to be occurring.

No matter the approach you utilize in your trading, it would benefit you to spend some time assessing whether you’ve created a holistic trading strategy that incorporates all aspects, including the very important area of trade psychology and mindset. A trader who fails to do so is actually a wannabe who will likely find themselves separated from their bank in short order.

Bottom line, do yourself a favor and chuck the trading is war mindset or the belief that you
have to steel yourself against the markets every second you have a trade on. Trading is not
supposed to be a white-knuckle experience—we seem to perceive it should be so, which in turn makes it so. Learning and implementing a professional mindset approach will help liberate you from the grind and drudgery that most experience almost constantly as they work their way out of trading.

How will you know you’re on the right track? It’ll be easier than you think. When you find that you’re making money trading and know at your core you’re not stressed and could continue doing so for years, just like the shopkeeper selling items one at a time, then you’re probably where you want and need to be…

Louis Horkan
Editor

 

Louis entered the biz in the late 80s and spent over a decade working as a trader, instilling him with unique insight into trading and the markets. In 1998 he switched gears to become the group editorial director for a large network of award-winning, trading-focused newsletters. In 2002 he became the founding editor-in-chief for two financial trade magazines—each served approx. 40,000 independent financial advisers nationwide. He’s appeared on business TV, in the business press and on numerous biz-focused radio programs in the past. He writes market commentary and analysis most days and trades on a daily basis.