How do I know when to quit trading?

Question

I started trading a few months ago, hoping to make even a small profit from the rebound after April. I followed the advice to stick to large, solid companies. I made some profit, but also a lot of really bad decisions.

I managed to buy Boeing when it was peaking. Now it's sitting at -20%.

I bought big in Netflix, convinced the pandemic would bring serious profits. All I got was a serious loss.

My Amazon trade isn't doing well either, and I fear a repeat of the Netflix episode (haha).

I suspect I'm just bad at this, and should cut my losses before I burn all my savings. I see ever more articles about how this bubble is about to burst, bringing potentially more loss.

How do I know if I'm bad at trading?

Answer 1

If you are investing in stocks, the best way to tell is to see how you compare against the S&P500. In general, that's your baseline.

The problem is, you've only been investing for a few months, so it's hard to see trend lines. Maybe if you stick to your plan, you'll do really well in a year or in ten years. But similarly, if you've beaten the S&P500, that doesn't mean you'll continue to do so. In fact, the vast, vast majority of investors are unable to consistently beat the overall stock market. You might have a few months of good luck but keeping that up for years or decades, almost nobody can do it.

So, my question is, why are you even trying? Why not invest in a low-cost indexed ETF that simply tracks the stock market? Or perhaps one that invests 60 - 80 % in stocks and 40 - 20% in bonds, and just ride those returns? Far, far easier. Probably cheaper.

Answer 2

(Because your original question asked "How do I know when to quit investing?"...)

You haven’t been “investing” at all; you’ve been trying to time the market.

“Investing” generally means buying assets and holding them for a long time regardless of market conditions.

“Trading” is generally the word people use for trying to pick individual stocks or other assets at a specific moment and then predict when the most profitable time to sell them would be.

Most people lose money when trying to trade. It is very difficult.

I recommend reading Unshakeable: Your Financial Freedom Playbook by Tony Robbins or MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins. You’ll learn how to invest in a passive, market-agnostic, diversified way recommended by the top investors in history (such as Ray Dalio).

Answer 3

How do I know if I'm bad at investing?

You already know the answer, don't you?

You are not alone: buying individual stocks is extremely risky and extremly difficult. Even highly paid fund manager have a really hard time keeping up with automatic index funds https://www.nerdwallet.com/blog/investing/index-funds-vs-mutual-funds-the-differences-that-matter-most-to-investors/

You can't beat the "market", almost no one can. However, it's relatively easy and cheap to keep up with the market: buy low-fee ETFs and diversify a lot. That's all it takes.

Answer 4

I’ve been doing this for 20+ years, and this is by far the most difficult year to pick individual stocks.

So, yeah, just buy a low cost ETF in this environment. Probably SPY at this moment. Buy QQQ if it ever pulls back to its moving average.

Valuations are at record highs for biotech and tech stocks. Valuations look like 1999, with a key difference: rates are likely to stay at or below zero for at least 3 years, maybe more. There is so much liquidity and low yield debt that there are few alternatives like there were in 1999.

The names you mentioned: amazon and Netflix both are great businesses, but the recent runups are way outside my comfort zone. I bought AMZN at $2450 , watched it drop, then sold at $2500, then watched it skyrocket to $3200.

Answer 5

If your reason for investing is not much more than "X is a big company, the stock is low/high/going up/going down [and the market is low/high/going up/going down]", then you are probably not great at investing. You could get lucky, but that wouldn't make you good at investing.

I don't even want to say "if your strategy outperforms some index, then you're good at investing", because getting good results doesn't automatically mean it's a good strategy (nor that you'd keep getting good results).

There's a lot more that should go into deciding to buy an individual stock (if your goal is purely to make money). If you:

• analysed the company in detail over the long term and the short term (e.g. by looking at their financial statements and any news about them)
• analysed their industry and competitors in detail
• analysed the market as a whole in detail
• have a strong understanding of economics and finance and how stocks typically move

Then maybe you just got unlucky. But if you're good at investing you should also know that's always a risk and you should diversify and potentially mitigate risks in other ways.

Investing into individual stocks can be fun, but I wouldn't expect to profit off of it unless you're really serious about it and spend a lot of time on it. Even then success is far from guaranteed, given that stock trading is competitive and there are plenty of other people who know what they're doing, and their trading pushes prices up or down. But if you are serious about it, start paper trading or trading with amounts that are small enough for you to not care if you lose it. And probably read a few books on the subject too. Once you've got a good strategy that performs well over a long period, you could consider aiming to actually make money.

Otherwise I would recommend just investing into a diversified set of funds or indices that's shown reasonable and consistent performance over the long term, and just leaving the money in there for years.

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As for your specific stocks: I would consider the future of the streaming space to be a bit uncertain at the moment. There are a few huge companies investing heavily into competing with Netflix. The travel industry is even more uncertain. Amazon probably isn't going anywhere any time soon, but they're already the market leader, meaning you also shouldn't expect a huge spike in value (the pandemic did contribute to an 80% climb in stock price in the last few months, but hindsight is 20/20 and I certainly wouldn't assume that increase will keep going). So my initial thoughts would be that those companies probably aren't the best candidates to consider investing into at the moment for good profit without too much risk. But I haven't done a detailed analysis of those companies (or any others) to be able to say much more than that.

Answer 6

I will add to the other answers that you are done investing when you need to take out the money in order to use it or feel like you have enough for the rest of your life and want to reduce risk (reduce variance) you can then switch to having a bigger percentage of your assets in savings or bonds. Until then you should keep investing because only long term yield is reliable (and that long term yield should be the reason you are investing). In this case I would keep the investments and see what happens to them in the long term (you already paid your brokerage fees). Yes keeping specific stocks is more risky then ETFs but the average return should be the same in the long run (or slightly higher to offset the slightly increased risk due to higher variance). I am assuming you did not invest all your savings and/or have time to earn new money to invest. In that case you can offset the risk you took by picking specific stocks by investing in a lower variance product such as ETFs next time (as suggested by the other answers).

Answer 7

Your question is equivalent to:

How do I know when to quit performing open heart surgery? PS: Tried my hand on three patients so far, but unfortunately they did not make it...

It is amazing how many people enter the financial markets thinking they might just be "naturally good" at it with zero training beforehand. The truth is, this job is very tough and you cannot imagine the amount of effort, preparation and research that serious businesses put into this in order to succeed. Seek out an education on how this is done, trade in a "paper trading" account for an extended period of time first, until you have measured your performance and can statistically verify that you are expected to perform well. Then maybe consider trusting your newly acquired skill with some capital.

Answer 8

I don't think you're trading or investing. I think you're throwing your hard-earned savings at the market and hoping that it works out. Luckily it's not going that well for you and you're realising that you're making mistakes before you get into something that you can't get back out of.

I think the first step is to decide whether you want to be trading or actively investing or passively investing or none of the above. For most people, I would say go with passive investing. Stick money into a pension pot every month and let the pension company invest it for you - also, have a look on here, I think you'll find loads of great answers about how to maximise that strategy, for example by buying index funds in tax-free accounts etc.

Active investing vs trading is more about the timeframe and both will take up more of your time and attention than the more passive methods. Essentially, trading looks to make money in the short term by buying and selling fluctuations in share price, investing looks to make money by buying a piece of a company for the long term and having a share of its profits. Investopedia has a longer article on it at https://www.investopedia.com/ask/answers/12/difference-investing-trading.asp

After that, you need to decide what your strategy is. Questions that almost every investor or trader can answer include:

What is your risk tolerance level? Bob Baerker mentioned this above. If the market tanked and half your savings vanished in the space of 2 weeks, could you sleep at night? One of my shares is doing that right now. I recently bought more. But my risk tolerance is very high and there will be experienced investors here reading that and thinking that I'm a nutcase, and they might be right. Your risk tolerance level will tell you if you should be trading or investing and what sort of things you should be investing in. It helps narrow down the things that you should be looking at.

What is your timeframe? How long do you want to hold an individual stock? What do you want to achieve from this? This will help inform your decision about investing or trading.

The next few questions are starting to get into strategy but you are going to need a strategy. Almost everyone has one even if they don't think they do. Pro investors have written strategies that are analysed to an incredible degree.

What makes you buy a stock?

What makes you sell a stock?

What makes you expand an existing holding?

What makes you partially sell out of an existing holding?

When and how are you going to collect your profits?

When and how are you going to stop your losses?

How are you going to hold your stocks? Are you going to be trading with options, CFDs, spread-betting, holding the shares? These all have different costs and will require different ways of thinking.

Some other things to start looking at: Investopedia has some decent beginners articles: https://www.investopedia.com/articles/basics/11/3-s-simple-investing.asp https://www.investopedia.com/articles/pf/07/risk_tolerance.asp https://www.investopedia.com/articles/basics/11/5-portfolio-protection-strategies.asp

Barclays has a guide on basic fundamental investment strategies: https://www.barclays.co.uk/smart-investor/investments-explained/shares/a-guide-to-basic-investment-strategies/

The Motley Fool isn't even a shadow of what it used to be, but it still has a decent enough guide at https://www.fool.com/investing/how-to-invest/

My recommendation for the moment is to do less trading, do more reading, do more thinking and ask questions on here.

For trading strategies, well, there's a reason most of the answers here are encouraging you not to do that. The only comment I have on them is if someone offers to sell you a trading system, there's a very, very slim chance that it will work for you and that's assuming the vendor is completely above board and genuinely wants you to do well. Treat them the same way as people selling sure-fire horse racing systems; your results will be about the same.

Answer 9

I am the OP. I guess I didn't register the account fast enough, and now I am cut off from my own question.

Thank you to everyone who took the time to offer some advice. I wanted to step back a few days, see what happens, digest your answers. Here are a few things I realized:

1. I got spooked by reading a few articles such as this one. Having my positions go down for a few months is one thing, the idea of 'all downhill from here' is terrifying. But later I found similar articles from much earlier, and also opinions to the contrary. So maybe these articles aren't that accurate, or at least significantly off-timing.
2. I don't have the stomach for this. Seeing large numbers in red literally made me lose sleep. I am not playing with borrowed money or next month's rent, but it turns out I'm really risk-averse. Even the ridiculous jumps this Monday (10% in one day? Really??) make me think there's something very wrong with either the market or my understanding of it. So I'll try to get rid of stocks when I have an opportunity. I sold my Tesla position, for a small profit, before the earnings call. This turned out to be the wrong decision again, but I'm fine with that. I'm choosing my peace over profit.
3. I'll try to hang on to the losers. Boeing bottomed out some time ago, and will surely recover once this Covid thing starts subsiding. Netflix... I'm less confident about. It seems to be treading water, so maybe it will at least recover some of the losses. It's the bubble bursting that got me worried.

I'll look into ETFs at some point. For now, I'm still a bit shaken.

Once again, thanks for your advice.

Answer 10

Stop immediately. You are not investing, you are trading.

99.99999% of amateurs that try their hand at trading simply lose most of their money.

Stop immediately.

If you wish to invest for the long term, do so - perhaps just an index fund or purchase a house.