4 Questions to Ask Yourself Before Making a Trade

Posted by Michael Comeau: Minyanville

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To say I had a lousy 2012 would be putting it mildly. The S&P 500 (INDEXSP:.INX) was up about 16% for the year, while my trading account finished down.

So what happened?

Did I have a run of bad luck with a bunch of bad stocks? 

Nope! Due to big fat bets on Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM), and Lions Gate (NYSE:LGF), I was up over 30% by March, despite being over 50% in cash.

Unfortunately, I then ingested a lethal hubris cocktail and started dabbling in all sorts of nefarious activities, including (but most definitely not limited to):

1. Messing around with natural gas options.

2. Being “smart” by making everything complicated.

3. Ignoring my bread and butter (betting on consumer trends) in the name of becoming yet another wannabe global macro trader.

My only consolation is that my idiotic moves were done behind my kimono, not appearing here on Minyanville.com or on the Buzz & Banter.

To keep myself from making another mess, I’ve constructed a checklist of questions I ask myself before making a trade to ensure that I never repeat last year’s extreme bout of self-sabotage. In the interests of entertainment and education, I’ve decided to post it here for you.

So let’s start with the most basic of questions you should ask yourself before making a trade:

1. Do I Have Any Idea What I’m Dealing With Here?

The commodification of trading through cheap commissions and the ETF-ication of everything on planet Earth means it’s easy to speculate on whatever comes to mind.

However, just because you can trade something that you don’t understand doesn’t mean you should.

Want to bet on Greek stocks? Then maybe you should know whether the EU is about to vote on an aid package.

How about corn prices? You should probably have some idea of what corn demand looks like right now, and what happens when futures contracts roll over.

Or maybe you’re looking at a bank stock like JPMorgan (NYSE:JPM). Wouldn’t it make sense to know how the shape of the yield curve affects bank earnings? Or whether some Senate subcommittee is about to launch a drone attack on the financial services industry?

At the very least, before placing a trade, you should have an idea of what makes that particular stock or bond or ETF or whatever go up and down.

That’s just the tip of the iceberg — so if you can’t figure that out, it’s time to head back to the drawing board.

That brings us to…

……read 2-3-4 HERE