For many people, video games became a boon to help pass the time at home during the early months of the Covid-19 pandemic. But for others, grinding games helped develop a new hobby: stock trading.
Fans of “Animal Crossing: New Horizons,” a popular life simulation game on the Nintendo Switch, became accustomed to different strategies for building in-game currency. The best method most players found for making a quick buck, however, was trading turnips in the game’s “stalk market.”
More ambitious players that have caught themselves pouring hours of research into turnip prices and futures have taken their interest to the next level by trading real stocks. But what’s important for new investors to remember is that trading isn’t all fun and games,” says Albert “Pete” Kyle, the Charles E. Smith Chair in Finance and Distinguished University Professor at the University of Maryland’s Robert H. Smith School of Business.
“Don’t confuse luck for skill and believe you are a good trader because you made money over a certain period of time,” says Kyle, The main thing people need to look at is that there is a statistical tendency for the market to go up over time, but it’s not guaranteed to go up in the future.”
Most investors, Kyle says, can build wealth with a buy-and-hold strategy. But that may not appeal to everyone. New investors often want to be involved in the market on a daily basis. For them, Kyle offers the following insights:
Don’t fall for momentum. People who are new to markets tend to be “momentum” traders, jumping on board when a rally is already under way. “Many small investors trade momentum with the wrong timing though. Either they look for momentum over too short a period of time or too long,” says Kyle. “I would encourage people to not trade with momentum in mind and to rather be more contrarian.”
Learn to live and let go. One of the biggest psychological pitfalls for traders is either taking profits too early or holding onto losses for too long. “It’s much better to cut your losses quickly or let your profits run for a while to see if you can get an even greater return. If it turns out that it’s not working, cut your losses quickly,” says Kyle. “If you were hoping for that $1 increase and it goes down by 10 cents, consider getting out and maybe going to play golf (or Animal Crossing) instead.”
Talk to the experts. The best thing a new trader can do is open an account with an established broker, Kyle says. Some brokers internalize order flow and can essentially guarantee you a price instantly, but the guaranteed price might not be as good as a less predictable price based on not internalizing the order.
“If you find that trading is for you, pick a broker that has low fees. Some brokers give better deals than others and you should shop around to find one that works for you,” says Kyle. “Be cognizant of trading costs and if you are, you’ll be able to recognize costs when they occur.”
More on Albert “Pete” Kyle
Kyle recently received the prestigious CME Group-MSRI Prize in Innovative Quantitative Applications for landmark contributions to the theory of economics and market structure. His research focuses on market microstructure, including topics such as high frequency trading, informed speculative trading, market manipulation, price volatility, the informational content of market prices, market liquidity, and contagion.