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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Michael C. Thomsett, author
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Thomsett Options
My book:
Getting Started in Stock Investing and Trading
  • Risk Controls – The Truth About The “Sure Thing” 0 comments
    Feb 5, 2014 9:23 AM

    Everyone has heard about the "sure thing" of low-risk or no-risk market strategies.

    But in reality, some risks may be lurking in the background, just out of sight but ready to pounce.

    What this means is that some traders, whether new to the market or experienced, may convince themselves that they have found the sure thing and that all risks are covered. So conservative strategies may appear lower-risk than they really are. These hidden risks are found in all kinds of trading activity, but low-risk delusion can be very expensive.

    Wisdom often comes at great expense. I can attest to this personally. I've been trading options since about 1978, and my three decades-plus experience has given me time to make just about every mistake a trader can make.

    Among the mistakes investors and traders make are:

    1. Failing to understand the true range of risk itself. Risk c0mes in many forms, and so many new investors don't know the business a company is in, or the risks that involves; do not study the earnings trends; and aren't sure whether a company is a sector leader or a lagging member.

    2. Assuming the entry price is "zero." No matter what price you buy in at, never assume the stock will move up from that point. The price is ever-changing, and it may rise or fall. Timing of entry (and exit) is critical in reducing this risk.

    3. Not understanding diversification. Many investors think they are diversified, but they are not. If you buy a set of stocks that are vulnerable to the same risks, that is not effective diversification.

    4. Forgetting to find out what business a company is in. Depending on the range of products and services offered, some sectors are higher-risk than others.

    5. Falling into the trap of brand loyalty. Do you love Coca-Cola but hate Pepsi? Do you love Apple but hate IBM? If so, does your personal bias match the investment risk or opportunity? Investors need to make a clear distinction between personal opinion and investment value; these do not always match.

    These thoughts only scratch the risk surface. You need to develop a smart investment analysis policy, meaning you select stocks based on a short list of fundamental criteria and you time entry and exit based on a few solid technical indicators. This improves your selection and your timing.

    To gain more perspective on insights to investing observations and specific analysis, I hope you will join me at ThomsettStocks.com where I publish many additional articles. I also maintain a virtual portfolio of stock at ThomsettStocks.com. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site to learn more.

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