Trading Rule # 1: Know What You Don’t Know

I have received some email inquiries recently from people looking to get involved in trading.    Unfortunately, I don’t feel like I’m much of a “trading teacher” – I can’t show you specific technical setups that I look for, and I can’t give you a course in valuation fundamentals.   My accumulated knowledge base is “qualitative” in some bizarre sense, and most of my thinking is driving by basic relative value or arbitrage concepts.  I’ve written about some of these trades in the past ($SPWRA, $NILSY, $GAZ, see links at the bottom of the post), but they don’t come up too often, and frequently they’re “un-tradable” on account of inability to short shares, which is why the opportunities exist in the first place.

However, I did want to start a “Trading Rules” series, where I spout random “rules” that I think traders could benefit from.  This post is rule #1, but that doesn’t mean it’s the most important rule (although it is a pretty damn important rule).  I will add future posts in the order that I think the concepts are easiest to explain, not necessarily order of strict importance.

So here’s rule #1:

Know what you don’t know.

What does this mean?  If you think you’d found free money in the market, well, there’s probably something that you’re missing.  There’s probably something that you don’t know – try to figure out what that might be.

There’s another meaning of this rule, which came to mind recently in my post about Natural Gas Futures.  I observed a well known quirk in the natgas futures curve, deduced an investment thesis from it, and asked my readers for input.  It becomes clear pretty quickly, in reading the comments from some readers who clearly know a lot more about the subject than I do, that there’s no easy answer.   There’s no magic get-rich-quick bullet, and if I want to develop a trade idea to take advantage of any natgas thesis I might have, I’ll have to do a crapload of work to understand the lay of the land in that industry.  I learned very quickly what I didn’t know:  I don’t know VERY MUCH about nat gas.

related:

Sunpower Market Inefficiency – the Slam Dunk Trade You Can’t Do

Sunpower Tender  – Game Theory Dynamics

GAZ – The Ultimate Greater Fool Trade

NILSY – Russian Odd Lot Arbitrage

Pharmasset – Merger Arbitrage Dynamics

 

-KD

$UNG, $GAZ – no positions

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