I’m remaining especially cautious with my trading during this ultra-volatile period for the overall markets.
While others try to predict a coin flip, I’m staying on the sidelines until all the information is in front of me.
When I know a major catalyst with an undetermined outcome is about to take place (like today), I’d rather wait for the event to take place before making any wagers.
If you put the trade on before the catalyst occurs, you’re basically ‘sports betting.’
As they say, “anything can happen on any given Sunday” … which is why I try to avoid these types of predictive trades.
The truth is, sometimes, no trade is the best trade.
And as we head into today’s consumer price index (CPI) report, I think now is one of those times.
Some traders are constantly chasing action. Others try to be heroes by making bold predictions.
But every day isn’t an opportunity. If you trade when you shouldn’t be, you could take a loss that could’ve been easily avoided.
With that in mind, keep reading and I’ll tell you why I’m avoiding any speculative trades before the CPI report…
Avoid ‘Sports Betting’ the Stock Market
Traders love to be correct with their forecasting, which creates an internal dilemma…
You see, traders don’t win by making heroic predictions … they win by making a lot of money.
As gratifying as it may be to say “I guessed the outcome of this catalyst correctly,” no one will care if you don’t make money doing it.
On the other hand, if you put a predictive trade on prior to a catalyst and you’re wrong about the outcome … you’re inevitably going to lose money.
This phenomenon occurs around earnings reports, Fed meetings, investor conferences, and product launches … any catalyst with an unknown outcome.
Overall, the risk/reward of these kinds of trades is poor. At best, you’ve got a 50/50 shot at being right.
In other words, you’re essentially ‘sports betting’ the stock market.
Now, imagine you wait until after the catalyst occurs before placing any bets…
By patiently waiting for the direction to unfold, you’ll take a lot of the mystery out of designing your trade.
The major reaction will have already taken place, giving time for any knee-jerk counter-moves to play out before you enter.
Additionally, the implied volatility (IV) on options will crater the moment the CPI numbers are released, making options premiums cheaper and, therefore, contracts more affordable.
This is what I’m planning to do for the CPI report … sit on the sidelines until the market direction is clear, then look for actionable setups.
3 Mistakes That Can Lead to Bad Predictive Trades
Considering all of this, why do traders attempt to predict the outcome of a catalyst and make trades they shouldn’t?
Here are a few common mistakes I see that lead to subpar predictive plays:
- Constantly chasing action
Some traders feel like they need to make a trade every day.
Chalk it up to boredom, lack of discipline, or impatience … but don’t do this yourself!
There’s a reason the best traders aren’t constantly making plays … they have a game plan and stick to it!
- Greedy positioning
If you buy options before a catalyst and you’re correct about the outcome, you’ll make more money than if you wait until after the initial reaction takes place.
This fact can skew the mindset of traders and cause them to misvalue the risk/reward of making the prediction.
Even though you’ll make more if you’re right beforehand, the odds of everything going in your favor aren’t good enough to justify the extra gains.
- Copying other traders’ plays
During major catalysts (like today’s CPI report), the temptation to chase other traders’ plays becomes even greater.
This is because everyone starts talking their trades up on social media, creating a wave of copycat trades in their wake.
But if you chase a trade you hear about online, you’ll probably end up in an overcrowded play. Or worse, a pump n’ dump!
WARNING: Don’t fall for this trap! Do your own due diligence. NEVER chase trades you haven’t researched yourself.
At the time of writing, we have a few hours left before the CPI numbers come out.
For the reasons laid out above, I’m staying on the sidelines until after we see the initial move…
And I suggest you do the same.