August 26, 2022

Coach’s Roundtable: Stock Market Indexes & Trading Fixes

Every week, the coaches at Prosper Trading Academy offer their insight on some of the most challenging questions covering recent stock market developments, trading tips, and relevant news stories. This week, Scott Bauer, Charlie Moon, and Mike Shorr touch on the best stock market indexes to follow and common issues they notice among struggling traders.

Stock Market indexes are good indicators to use when trying to gauge trading conditions. If you had to pick one index to accurately measure the market’s overall health, which one would you recommend?

Charlie: SPY! SPY! SPY! This is the market to watch for the broad health and direction. The DIA accounts for 30 companies and the QQQ accounts for 100 companies. The $SPY accounts for 500+. So the weighting for broad market activity and price movement is clearer when the SPY is moving up or down.

Mike: If you are watching a particular stock, it’s going to be very difficult to take a directional play to the upside or downside if the major indexes are not in trend-agreement. For me, the index to watch is QQQ.  That is of course, tech-heavy and the leading indicator to watch for the stocks that I enjoy to trade.

Scott: Simply put, I would follow SPX (aka the S&P 500). It encompasses the largest stocks from all sectors.

Unfortunately, not every student becomes a success story. What are the most common issues you’ve noticed among struggling traders, and what type of fixes do they normally require?

Charlie: The typical problems with traders are two factors. One’s lack of knowledge and education. With new traders, it’s both plus a lack of plan. That is the key factor. Have a plan. Define your risk. I never met anyone with issues buying a stock, but the problems are after they buy. They either hold too long when it goes against them and take too big of a loss, or they hold too long on their winners not take profits when they should.

There is some science behind trade aka a method to the madness. The old saying “patience and discipline” is tried and true. There is a bit more too it of course, but have a plan and being disciplined to stick to it is very key. Why? Because losses are a cost of the business. I have never met a trader that has won every single trade they took for their career. If you guys ever come across one, let me know so I can learn from them too. Since losses are a part of trading, it is important to control our drawdowns and maximize our gains and PROTECT our gains. #1 rule I say to every new trader: “Your JOB and GOAL is capital preservation.”

Mike: Once the theory of options trading is mastered, not basically understood, but mastered, it is all a psychological game. The theory is accomplished by studying, the psychology is something that we have to force ourselves to do. It goes against everything our brains are hardwired to avoid. Risk management and more specifically, the ability to recognize and then execute a loss. Take small losses. Those will not hurt you in the long run. It’s the big losses that will. Use your stops religiously and maximize your games. It’s a simple rule, but not an easy one to follow. Once you do that, you will see your trading results turn positive almost immediately.

Scott: It ultimately boils down to the fear of missing out. FOMO is the biggest problem. Traders want to “feel the action,” but many don’t understand that you absolutely cannot force a trade. As a result, it’s not uncommon to see these traders learn this lesson the hard way.

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