When trading stocks, it is crucial to rely on yourself and not depend on signals from professionals. Professionals who signal might have different strategies than you do, and they might fail to assess the situation at hand properly. Professionals might also be biased in their signals which can lead them astray and cause investors to suffer losses. Today we’ll discuss FOUR reasons why you should avoid depending on professional signals when trading stocks.
Professional traders take care of themselves first
First, professional brokers and traders will always help themselves before helping their customers because they want good returns first. Only then will they invest your money (Kahneman & Tversky, 1984). It is because those who sell goods or services earn more money when they sell more products. If you were a professional who was given a chance to make an extra 20$ regardless of how you achieved it, would you turn the opportunity down? Of course not. This means that those who signal will always help themselves first and design their signals to benefit them regardless of whether it helps out investors. In this case, traders might run strategies that are very high risk but with high returns (and they know that most people do not have the stomach for these kinds of high-risk moves).
More help with trading stocks:
Professional signals might be biased
Second, professionals might be biased in their signals, which can lead inexperienced traders astray since there is no way of knowing the actual situation (Sachs, 2000). This is because professionals might want to seem more popular and successful than they indeed are. So information that you receive from a professional could be full of lies or just overall inaccurate. For example, if a professional signaler wanted people to invest in a company he recommended, he would make the signals as appealing as possible to convince as many people as possible to buy its stock.
There are no set rules when making predictions
Third, there is no way of knowing whether or not the professional who made the signal generated it themselves (Sachs, 2000). Unfortunately, there is no guarantee from any brokerage firm that their employees will follow a particular set of rules when making predictions about trades, which can lead inexperienced investors astray. This is because some employees might be more skilled than others, and they might give more reliable signals than the signals of less experienced workers (and since professionals want to help themselves first, it does not benefit them to make their predictions on trades public).
You have no idea what information they used
Fourth, professional signalers might rely on the wrong information when making their predictions on trades (Sachs, 2000). For example, if a trend is clearly showing that one company’s stocks are improving while another company’s stocks are declining, it would be unwise for a professional trader to bet on both companies because they will most likely lose money in this case. If the same person were an inexperienced investor betting their own money, there could be nothing wrong with betting on companies where the trend is clearly in their favour. Professional signalers might also use old or otherwise inaccurate data when making predictions about trades, which could lead inexperienced investors astray.
It is clear to see that if you were looking for signals to trade stocks, you should not depend on professionals only. They are typically biased, do not know how to assess situations at hand correctly, and might rely on the wrong information when it comes to predictions about trades. Instead, you should depend on your own skills and knowledge of stock trading if you want to be successful. But there are many professional signalers out there who encourage people towards investing…why? Because these professionals will get paid regardless of whether or not you make a profit.