I know people who would make very good traders, but they feel that the markets are too complex, so they don’t trade. Ironically, many of these people will use the same skills required to trade when they enter a sports pool. Trading is very similar to picking teams for your football pool. Both require that you analyse statistics, and measure past performance to make informed decisions.
Here are four lessons learned from fantasy football that can help you trade.
1. Lesson Learned: A trader should not risk more than 1-2% of their account value on any one trade.
Anyone who is in a sports pool understands that a season is made up of many games. It is the outcome of these games that makes a winning or losing season. Traders often fail to realise that it is a series of their trades that leads to profitability and not just one specific trade. Most traders risk too much of their overall account value on each trade.
2. Lesson Learned: Just because a person is an “expert” doesn’t mean that they know what is going to happen to a stock, just like what happens on the field may be very different than what is predicted in the pre-game show.
Announcers and analysts will predict which team will win, most sports fans have their own ideas and will challenge the experts. They know that the experts are not always right and that some experts are better than others.
New traders generally listen to one reporter on a website or on a TV show and will bet a large portion of their trading portfolio on that person’s opinion.
Sports fans know that anything and everything can happen on the field, fumbles, and interceptions are all part of the game and cannot be predicted. Trading assumptions are the same, there is a favorite before the game, but anything can happen during the game and predictions are only educated guesses.
3. Lesson Learned: What are the odds of your stock reaching the levels the analyst is suggesting?
In sports we are given the odds of an event happening, a team may be the favorite to win the game. We pay attention to this and understand that the more certain the event the less of a return you will get on your bet and also the higher probability that you will be right.
Traders hear that Apple is going to $700.00 and most will think that this is a sure 100% bet because that is how the analysts talk. If analysts gave odds to their price targets most investors would understand the risk/reward of the trade.
Remember if you wouldn’t bet on the long shot last place team to make it to the Super Bowl, why would you bet all of your trading account on a long shot trade? People involved in sports pools also understand that more risk = more reward = less chance of happening and less risk = less reward = more chance of happening. Traders need to understand that every trade is two sided; if there is potential for a large reward then there is an equal amount of risk being assumed.
4. Lesson Learned: How the team plays on game day is a much more important measure, than the stats of the individual players.
When analyzing a team to add to your sports pool do you look at one individual player to judge the strength of the team, or do you base your decision on how the players interact and play as a team? Looking at the players as individuals is the equivalent to fundamental analysis, such as looking at individual financial ratios in isolation to make a trade. Good sports analysts understand that the performance of the team is more important than the performance of any one player.
Technical analysis allows you to see how the stock performs on game day, i.e.: how traders are willing to trade the stock, not how an analyst thinks the stock will move. You may have a star player (the equivalent to a strong financial ratio) that looks great on paper, but at the end of the day it is all about how the team plays together, or how the buyers and sellers (i.e. two teams) move the price of the stock. If buyers win the stock goes up, if sellers win the stock goes down.
Trading is a skill that can be mastered. There is no reason to fear trading. There are many benefits to being in control of your financial future.
When you think that trading is too far out there a concept to learn, bring it back to sports pools that you might be in at the office, stocks are like the players, chart patterns are the statistics. I am confident that if people spent as much time analyzing their portfolios as they do playing in the office sports pool, they would be in much better financial shape.
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