By Chris Ebert

You’re special!

It’s a hackneyed line spelled out in many a late-night club.

But, for many traders, especially new traders, the idea that their stock is special can seem alluring. Corporate Earnings reports and other economic data and news can enhance a trader’s sense that their particular stock pick is special – perhaps immune to macro market forces – and thus prone to big gains, even if that specific sector or the market as a whole is struggling.

My stock pick is somehow special! (or so the trader surmises).

In reality, traders are fed data that is intended to lure them into the illusion that they are picking something special. Obviously, there will be times when such an illusion pays off with big profits; statistically some stocks will undergo huge gains, and a trader who happens to own one of them could win big merely by chance. However, in the long run the illusion is nothing more than that.

Traders can certainly profit when they recognize an illusion. Technical traders are adept at recognizing such illusions, and they can profit from the folly of Fundamentalists.  Likewise, fundamental traders can profit when they see a technical chart that appears to be an illusion relative to corporate fundamentals.

Companies often tout that they have the best employees, the most educated workforce, the cutting-edge technology. In the end, it’s all advertising.

Illusion is the key; and it is dangerous to discount the lengths that anyone, be it corporations, stockholders or others, would go through to promote an illusion for profit’s sake. It happens with stocks. It even happens with cities, as shown in the following examples.

Is Nashville, Tennessee more special than Rochester, New York, for example? Is $AMZN more special than $AAPL? It all depends on the advertising. It’s up to traders to know when they are being intentionally fed data, perhaps with an ulterior motive, and when they are simply receiving unbiased data. The inability to distinguish between the two can lead to disappointment, losses… and in the worst case, total destruction for a trader. But, make no mistake – those who intend to alter perception of the data can make a cold distant outpost such as Rochester seem as alluring as a much more temperate city such as Nashville.

As each video clearly states: Makes no difference where I go. You’re the best hometown I know.” Obviously Nashville and Rochester can’t both be the best hometown (their climates are practically polar opposites). Yet that same line has been used in countless other cities around the world. Whether picking a stock or a hometown, don’t fall for that line! It’s only appropriate in a nightclub.

The preceding is a post by Christopher Ebert, Chief Options Strategist at Astrology Traders (which offers subscribers unique stock-trading perspectives and options education) and co-author of the popular option trading book “Show Me Your Options!” Chris uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to OptionScientist@zentrader.ca

 

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