6 types of self-goals to avoid when trading

Of the many ways in which FIFA World Cup has made a mark, there is also a dubious distinction that belongs to the 2018 edition of the games. Besides the 1998 World Cup that was held at France, this is another World Cup that has seen the maximum number of self-goals. A self-goal is when the soccer player nets the ball into his own goal post and, in the process, gifts a free point to the opposition. In many ways, self-goals are unpardonable; you not only put your own team behind but also give the opposition an advantage. At a time when FIFA 2018 has already seen 6 self-goals, let us look at 6 such self-goals you should avoid when trading.

Boasting about your trading strategy

This is the first major self-goal that a lot of traders are guilty of. Your strategy has been framed with multiple iterations and at a stiff cost. They are meant for your proprietary use. Don’t make it public so easily. The beauty of any trading strategy is that it works as long as it is not being tried by too many traders at the same time. If you publicize your trading strategy, you are literally inviting others to join the party. You don’t need to do that. Give a generic idea of your trading strategy to others but never discuss the specifics. The more you play your cards close to your chest, the longer your strategy will work in the markets.

Trying to outsmart the market

This is a game that countless traders have tried and lost out. Trying to outsmart the market is something an investor with a long trading horizon and a big capital can try. When the market moves in a particular manner, it is actually trying to give you a hint of the underlying trend in the market. Your job as a trader is to read this trend and trade accordingly. If you try to outsmart the market, you are always going to end up on the losing side because the market represents collective wisdom and is always smarter than individual traders.

Averaging your losing positions

That is a classic self-goal as the temptation to average your position can be quite strong. Say you bought Reliance at Rs940 with a stop loss at Rs920. If the stock price comes down to Rs930, the inclination is to average your position and reduce your cost of buying. This approach has two problems. Firstly, you were wrong once and now you are trying to be wrong again. Secondly, you are inadvertently increasing your exposure to a stock which is not in line with your trade rule book.

Trying to behave like an investor with the capital of a trader

The most important point to remember is that you must think like a trader. A trader always trades with finite capital. The definite of finite will be different for you and for George Soros, but the bottom-line is that capital is still finite. A common self-goal in such cases is to convert a trading position into a delivery position just because you can arrange the funds required. Don’t behave like an investor. You can do that with your investment portfolio; not with your trading portfolio.

Creating overly complex trades

This is not too frequent in cash markets but traders who trade in futures and options have the tendency to create overly complex positions. You sell calls and puts of multiple strikes and also buy calls and puts of multiple strikes. This approach has two problems. Firstly, you yourself do not know if you are long or short. Secondly, this multi-layered position also has to be closed, which liquidity and cost a major issue. Ideally, formulate a view and keep your trade as simple as possible.

Not bothering about trading costs

This is perhaps the biggest self-goal that traders tend to indulge in. If you are a trader, you are looking to churn your capital aggressively. That automatically implies that you need to keep your trading costs low. When you are trading, it is not just the transaction cost but also the statutory costs that can add up to quite a bit. You will be doing yourself a disservice by not keeping a tab on your costs.

In soccer, a self-goal is a sign of carelessness, lack of discipline, and a casual approach to the game. That is why captains frown upon self-goals and it would be best if you avoid it in your trading too!