Today we are not talking about how to set up and run the new StockTwits Desktop. For that sort of tutorial check out what Justin Paterno has to say on setting up your very own version of the software. Instead we are talking about the broader notion of idea generation.
Smita Sadana at Minyanville has a thought-provoking article up which we quoted from in today’s linkfest that discusses the importance to traders of who they “hang out with.” To remind you:
Dissenters can give us the greatest gift of all: an open mind. This is the prerequisite for a flexible approach toward investing. As Thomas Dewar stated: “Minds are like parachutes. They only function when they are open.”
As investors we are bombarded with fact and opinion on a continual basis. That does not mean we approach each item with an open mind. As traders we are often looking to find information that confirms our already firmly held beliefs. In short, we are all plagued by confirmation bias:
Confirmation bias is an irrational tendency to search for, interpret or remember information in a way that confirms one’s preconceptions or working hypotheses.
The process of trading is nothing else if not the generation of working hypotheses. Testing a hypothesis takes form as a trade. In science a well-constructed hypothesis must be testable, that is falsifiable. The same holds true in trading.
Each and every trade (or investment) must have a trigger by which the trade is found to be false. For traders this often takes the form of a price (or time) stop. For investors it may have some fundamental basis. In either case, entering into a trade without some means by which you can judge your hypothesis to be false is almost always a mistake. That is how novice investors end up riding losing trades down.
A recent example of this is the case of the United States Natural Gas Fund (UNG). There has been a cadre of traders keen on the long-term bullish case for natural gas prices. Unfortunately many of them have ignored the fact that natural gas prices have been in a pronounced downtrend and their vehicle of choice has lost touch with its net asset value. While the long term case for natural gas prices may still be intact, the near term performance has (for now) falsified that view.
The good news is that it is now trivial to expose yourself to countervailing viewpoints. In our daily linkfests we often link to posts that are at odds with each other. You can also do this at home on a do-it-yourself basis. Whether it be on blogs, Twitter or StockTwits it is easy to find investors and/or traders who approach the markets in a different fashion than your own.
For instance, a fundamental investor may want to see what a technical trader has to say. A day trader may find it useful to follow someone with a longer term horizon. A technical trader may want to follow a quant who automates their approach to the market. As you can see the permutations are endless.
The point is that no one person (or method) has all the answers. We learned this early on as a fan of Jack Schwager’s Market Wizards. The fact is that there are as many ways to make money in the markets as there are traders. Feel free to follow traders of a like mind. However, the opportunity today is to expose yourself to some new ways of thinking about the markets. The positive thing is that in the age of services like StockTwits, exposing yourself to a range of opinions is just a click or two away.
*Disclosure – Please note that Abnormal Returns is a partner with StockTwits.
