Guy Adami, stocks editor at OptionMonster.As I watched the NFL draft over the weekend, it dawned on me that it's not unlike trading. The outcome is pretty binary, success or failure. But there are some important differences that I'll discuss in a bit, if you'll indulge me. I am a huge New York Giants fan. My first memories of Big Blue are the awful teams of the early 1970s. The Giants seldom won back then, and their lack of success can be linked directly to their drafting strategy. In 1970, the 13th player selected in the draft by the Giants was a linebacker out of Oklahoma, Jim Files. He played for the men in blue for four years. With the 18th pick in the 1971 draft, they chose Rocky Thompson, a running back out of West Texas A&M. He played with the Giants for three years and rushed for a whopping total of 217 yards. To rub salt in the wound, the next player chosen by the Oakland Raiders was Jack Tatum, one of the most feared defensive backs of all time. In 1972, the Giants decided that maybe they could use that d-back, so they chose Eldridge Small out of Texas A&M at Kingsville with the 17th pick in the draft. If Small's name doesn't ring a bell, don't worry -- he played in New York for three seasons and had only one interception. In 1973, the Giants figured their first-round prowess wasn't all that stellar, so they waited until the second round and the 40th pick in the draft to select Brad Van Pelt, a linebacker out of Michigan State. Van Pelt went on to become one of the great Giant linebackers in the history of the franchise.
With the third pick of the 1974 draft, the Giants selected John Hicks, the Outland Trophy-winning guard out of Ohio State. His underwhelming NFL career lasted four years. You get my drift. So it wasn't all that surprising to see a bit of revolving-door action in the front office back then. It wasn't until Bill Parcells took over that the Giants were able to get their act together. But here's the major difference between the draft and trading: A team that drafts poorly in the NFL feels the effects for years, especially if they take a chance to move up in the draft. A trader, meanwhile, can recover from a bad trade. That brings us back to something that I continue to harp on: discipline. So many traders whom I meet have great ideas. Many can be right 75% of the time, yet they still manage to lose money. Why? Because they lack the discipline to get out of losing trades. General managers in the NFL are forever linked to bad draft decisions. Do the names Ryan Leaf, Andre Ware, Aundray Bruce and Ki-Jana Carter ring a bell? Well, if you are the general manager who drafted these players, they should. Some of these picks ruined the careers of general managers. For traders, no single decision should have that effect; you can have more trades that lose than win, and still make money. It comes down to discipline. Don't allow bad trades to get worse, and never chase "bad" money with "good."
The question I often get is: "How do I know when I am wrong?" The answer is simply this: You can do all the proper research and your trading thesis may be spot on, but if you enter into a trade and it just "feels wrong" then go with your instinct. How many times have you put on a position and said to yourself, "This just doesn't feel right?" And how many times has that instinct been correct? More importantly, how many times did you not listen to your gut and stayed with the trade? How many times did it end poorly? These are the questions you need to ask yourself, because it is important that you constantly evaluate your positions. As traders, we have the luxury to get in and out of positions. General managers don't. It's an important distinction, and it's one you should think about every time you trade.