You hear us say it all the time, but what does it truly mean? Well, it relates to the dangers of creating bad habits through random rewards. Random Rewards relate to having a positive outcome occur, that could have been more a factor of luck than anything else.
We are very clear on our “don’t hold stock into earnings” stance, and for good reason. Earnings are a gamble no matter how you look at them. A lot of times a company crushes earnings but something like their guidance is off, which causes the stock to tumble. It is impossible to anticipate the earnings reaction (unless you have inside info which we NEVER trade off), therefore playing a stock into earnings is merely gambling. This is no different than playing blackjack or betting on the Knicks. Ok, maybe you have better odds in Blackjack than with the Knicks.
Either way, let’s say you disregard all our advice and buy Apple into earnings. Apple’s the best company in the world, nearly everyone has an iPhone, how could they miss? So you buy some stock.
Apple beats earnings and you have a HUGE winner on your hands! Great! You are feeling absolute euphoria because you had no idea what to expect in the outcome, and it worked out in your favor. All of a sudden, trading earnings isn’t so bad! You have successfully created a terrible habit within your subconscious. You KNOW deep down in your soul that trading earnings is gambling, but in your heart of hearts you still feel that win which brought you so much satisfaction. This is undoubtedly going to cause you to play earnings again, which is the problem with random rewards.
Earnings are just one example of a random reward but we see them happen all over the market. Maybe it came in the form of buying a weak stock and getting bailed out by a strong market.
Have you ever bought a scratch off and won the first time? What is your next move? I’m hot! Time to buy more scratch offs. In reality, you got lucky the first time and this trade has absolutely nothing to do with the first trade. You’ve just created a bad habit that will lose you money in the future. Random rewards are something to be avoided at all costs. Winning trades come from putting together a ton of layers of probability in your favor and executing appropriately.
A bad habit is like the plague and it must be defeated.
Do you have balls?
Can you think of a time you’ve had a random reward? What was the trade and how did it play out?
Did it create a bad habit?
Did you take a future loss in the same setup?
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