Following chat rooms can be both helpful and devastating. This is especially true for the rookie trader. Rookie traders are more likely to blindly follow others because they believe other traders have more experience. They place complete faith in them when they are unsure of what to do. The time when you follow others blindly is more likely to occur when you cannot predict market direction with your current methods and trading rules. When your trading plan and strategies don’t give you a good risk/reward strategy, you should stay out of the market. Always stay on the sidelines when you don’t have a plan of action.
The reason that you never trade when things are not set up correctly is to protect yourself from great financial loss. Chances are that you will make incorrect trades. Trading against your rules and following others because you have the impulse to trade is simply wrong. The odds are greatly against you. The one time you decide to follow the best trader in the chat room will be the time that top trader fails miserably. Why don’t you ever follow others when you know what to do? It always seems the more confused you get, the more you rely on other traders. This often happens after a few consecutive losing trades.
Traders will lose confidence and look to someone else for guidance. Say you are waiting for a situation that appears promising. You notice this nice temporary opportunity on the Level 2 screen and your 5-minute chart. When you see this, you turn to the chat room and look for confirmation. You observe that one of the top three traders in the room agrees with you and gets into position. You never followed him on his last three winning trades because the setups felt wrong. But this new trade he just executed feels right, the setup was clearly visible and you blindly follow. Well, of course, immediately after your order gets filled, the stock turns against you and takes out your stop. You notice that the trader you are following took a small stop-loss. You also take a few hundred dollars more open loss on your current position before the leading trader’s exit price shows up in the chat room.
Now your loss is too deep to take a small stop-loss. You panic and begin to trade with emotions. Do we really need to say what happens next? You guessed it! You take your stop-loss at the maximum amount of pain, and then the stock goes in your desired direction. So why should you even use chat rooms to trade? Well, they can also be a great benefit. First, they can keep you in a good mental state. It isn’t healthy to trade all by yourself. It can be good for you to be social throughout the trading day. Hearing a few good jokes before the opening bell will put you in a positive mood. Chat rooms can also create competition that is healthy and which increases your motivation and your bottom-line.
This friendly daily competition can be based not on a monetary measurement but on a point basis. This means that if your account size is $100,000 and your competitor’s is $500,000, you can still compete on an equal level. Just compare how many points you earn during the event. Perhaps your competitor uses 5,000 shares to earn two points in one day. Two points equal $2. Two points with 5,000 shares equal $10,000 in profits. You may be able to earn three points in one day using 1,000 shares. Three points times 1,000 shares equal $3,000 in profits. Even though you did not earn more money than your competitor, you still win by 50%. Chat rooms can also be the best place to get the news before anyone else.
More times than not, chat rooms will have news posted minutes before CNBC reports it on television. Just remember that it’s not the news that makes stocks move, it’s how people react to the news that matters. Many times a company will report above-expected earnings and the stock will sell off dramatically. It’s this reaction that gives the correct market direction for you to sell short. If you had blindly followed the news, you would have anticipated higher prices and gone long, only to lose your hard-earned capital. Chat rooms can be a great place to anticipate people’s reactions and to help you think in contrary terms.
If you rely solely on television, you will be in serious trouble. Any time a company releases positive earnings, the media fills you full of propaganda so you feel bullish even though the stock is selling off. Chat rooms can provide you with some serious intellectual analysis, which cannot be found through CNBC. Remember that George W. Bush manipulated the media to pump Americans full of propaganda so that he could illegally invade Iraq because they were supposed to have weapons of mass destruction. Likewise, CEOs can manipulate the media to make you believe their companies are profitable even as they are unloading their own shares. Without any buyers, top executives cannot sell their shares. Since the CEOs are so deeply affiliated with media companies, they can spin the media to help them achieve their goals, and they do it all the time. So be cautious the next time a CEO goes on CNBC and starts talking up his stock, especially if the stock has recently had a strong run higher. Day traders consist of the most brilliant people on the planet.
Chatting with people of such a high calibre can only be beneficial, as long as you don’t blindly follow them without your own rules. The greatest problem is getting into a trade without knowing your stop or profit targets. If you follow a known elite trader from a chat room, choose your own stop-loss and follow it exactly. Never break this rule. In order to use chat rooms correctly, you must never tell how many shares you are trading. Remember that trading emotions are completely relative. Use terms such as “Long ERTS large.” This means that you are risking most of your capital in this trade. “Long MSFT small” means you are taking a small position. “Long AAPL – Starting position” means that you are planning on adding more shares to this position in the future. You have not used all your capital and have room for more additional shares. “Short Sell PCLN Betting the farm” means that you are short full margin and risking four times more than you have in capital.
If you are not familiar with chat-room lingo, you probably don’t know which people in the room are good traders, which ones are liars, and which ones are bad traders. Get to know the bad traders more than the good ones. Watch them very carefully. They are the most useful source of vital decision-making for profits. No, this isn’t a joke. Chances are that when you follow a good trader, you do it blindly without a plan.
When you use bad traders as an indicator, you already have a detailed plan in mind. You use bad traders when you are in the following situation: You have a stock all lined up ready to go long. You check the market internals and there is some conflict. You are ready to pull the trigger but are hesitant. The bad trader just posts in the chat room that he sold short the stock you want to buy. You immediately pull the trigger and go long. The bad trader stopped your hesitation and helped you make a good decision. You use bad traders as a contrary indicator, something that is not available in your charting software.
That’s right. You heard it first, the Bad Trader Indicator or BTI for short. The Great Trader Indicator (GTI) can also help increase your profits. The hardest part about this indicator is choosing, or at least realizing, the time-frame in which these great traders play. Many traders can be quick to pick out who the great traders are in the chat room, but they sometimes don’t make an effort to understand the time-frame.
Let me explain something that typically happens. Denver is a fantastic trader. You have been following his trades for five months and you know he is definitely profitable. He posts a trade: “Long GM $52.40.” You get exited and decide you want in on the action, so you make a day trade with 2,000 shares and also post it in the chat room: “Long GM $52.36.” The stock drops 50 cents to $51.86, hitting your stop-loss and you lose $1,000. Ten days later, Denver makes another chat-room post: “Sold GM at $58.03.” What just happened? Denver wasn’t day trading, he was swing trading.
This means that he wasn’t betting most of his capital on that trade. Swing traders usually carry 500 shares in their position, depending on their account size. But in this example, let’s assume both you and Denver have the same account size. Because Denver was swing trading and not day trading, he used a lower share size than you did, and he also had a larger stop-loss. This is why he won and you lost. Before you follow even the greatest traders, make sure you know if they are scalping, day trading, swing trading, or investing. This does matter, and you must find out this information if you want to use chat rooms to your advantage.
Following others without proper money management leads to disaster. And the only way to manage your money is to know in advance the time-frame in which you will be trading. If you are not sure what time-frame the chat-room traders are using, ask them. They will be pleased to share this information. When following others, most traders follow the entry price. If you agree with an entry price another trader has posted, choose your own entry and exit rules, including your stop-loss. Stick to your plan, not theirs. They might be able to hold through a larger open loss than you can, based on their financial situation and experience.
So before you follow, know your own personal trading rules. This Trading Room is intended to help all members take advantage of trading opportunities. Active participation and discussions are encouraged, as it is what makes us unique and successful. Off-topic conversations during active market hours of 8:00 a.m. EST and 5:30 p.m. EST are to be avoided at all measures. Participants should never Buy or Sell securities based upon opinions or information presented on this site. We recommend consultation from an investment professional before acting on advice from other participants.