What Star Wars Teaches You about Trading

With a new Star Wars film on the horizon, there is a huge buzz about what’s happening in a galaxy far, far away. However, what most people don’t realize is that Star Wars is a perfect teaching vehicle for traders. Seriously – who doesn’t want to trade with the same sort of vision that Yoda had? While it may sound corny, there’s a lot that traders can learn from Star Wars.

Here are a few examples.

Use the force

Well, the force may not permeate the entire galaxy, but there is an invisible energy that you can tap into when you’re trading. It’s called sentiment, and it moves markets. While contrarian investors such as Warren Buffett make long-term profits by value investing, if you’re a short-term investor then a contrarian approach is often a recipe for disaster. A few investors make this work, but you may make much better profits by following trends.

Fear is the path to the dark side

Obi-Wan Kenobi knew this, and Darth Vader was further evidence. Fear – or any emotion may turn real investment opportunities into disasters, and may make traders think that opportunities exist when they don’t. When looking at in investment – or a short-term trade – try not to let fear or greed influence your decision. Take a completely unemotional approach, and evaluate opportunities based on hard facts. Once you have invested, stick to your investment plan rather than letting greed or abject terror make you do the wrong thing.

Humility pays

Hans Solo said it best – “Great kid. Don’t get cocky”. When you’ve just pulled off an amazing trade, it’s so easy to think that you’re invincible. But you’re not. As the saying goes, past performance is no guarantee of future success. Just because you have had a winner doesn’t mean that you can throw caution to the wind. If you do, you’re no better than a gambler – and gamblers lose in the long run.

Have faith

You shouldn’t listen to the dark side for the most part, but Darth Vader had it right when he said “I find your lack of faith disturbing.” Traders lose faith too easily – particularly when they’re on a losing streak. You can’t expect every trade to work out in your favor – the goal is to maximize your winners and control risk around your losers. If you’re tempted to throw out your strategy every time something doesn’t work, then you’re going to end up abandoning perfectly good strategies without any good reason. If what you’re doing is failing consistently, then you need to look at alternative approaches. However, a few disappointing trades is no reason to walk away from a proven strategy.

It’s a trap

Admiral Akbar may have been caught by surprise, but you shouldn’t be. Before you enter into any trade, you need to do your due diligence. If something looks too good to be true, then it well may be. Smart traders look at what could go wrong, rather than just jumping on opportunities that seem to be right superficially. That doesn’t mean that you should avoid any trade where there’s hint of doubt – but it does mean that you should be managing your risk in case things go wrong.

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