OptionsHouse is offering 100 commission free trades for new accounts with promotion code FREE100. You must deposit at least $3,000 within 45 days and the 100 free trades expire after 60 days of funding. This offer expires December 31st, 2009.

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There are two mistakes that most people routinely make. They let emotions play too big a role in their decision making and they fail to adequately plan for the worst case scenario before the worst case scenario actually happens. These two mistakes aren’t a big deal when you’re planning dinner, but they can be disastrous when it comes to investing in the stock market. Reacting emotionally to the market can lead to bad decisions, which is compounded by the fact that we react to worst case scenarios rather than plan for them!

Fortunately in investing, we can use some of the tools to protect ourselves against it. I’ve recently been reading more about it and one of the best ideas I’ve seen is the use of stop loss orders and trailing stop loss orders to your advantage.

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This is a guest post written by Mark Wolfinger of the investing blog Options for Rookies. Mark grew up in Brooklyn and in an earlier life, earned a PhD (chemistry) from Northwestern. After several years as a research chemist, in Dec 1976 he moved to Chicago to trade options. Over the next 23 years, he was primarily a CBOE market maker, but also worked as a risk manager, and coached new traders. He left the CBOE in 2000 and began a career as an educator. He’s published three books and numerous magazine articles.

Mark recently authored The Rookie’s Guide to Options and he approached me with a novel guest post idea. You don’t normally associate options with passive investing but he is going to explain how you can use options, specifically collars, to protect yourself when passive investing.

Let’s begin by agreeing:

• a) Passive investing beats active investing – for all but the few talented traders who consistently outperform the markets. Let’s also agree that none of us is a member of that elite group.
• b) The rules: allocate assets, diversify, buy and hold, don’t panic by selling into market declines etc. These are the most commonly used methods to minimize investment risk. They are constantly repeated by journalists, bloggers, brokers, financial planners and financial advisors.

Should most of us follow this advice with confidence? Do we save a portion of each paycheck, invest passively, and confidently accept whatever happens?

I vote ‘no.’

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That’s right! A guy who actively buys and sells stocks is suggesting you should stick with Plain Jane index funds.

Why?

Because it’s too difficult for 99% (a completely unscientific statistic) of the general public to outperform the market over an extended period of time.

Every week, at least one person will ask me for a hot stock tip. Almost every single time, I tell them to buy a basic Vanguard S&P 500 index fund. If they keep up the pressure and want something more aggressive, I tell them to buy the Vanguard Small-Cap Index Fund which passively invests in smaller, higher growth, but higher risk companies.

Now, before the pro-index fund, Boglehead crowd showers me with kudos and the pro-trader crowd throws flaming bags of dog crap on my porch, allow me a few moments to debunk the Get Rich Quick by Becoming an Active Trader myth.
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When the market took a nose-dive earlier in the year, I tried to catch a falling knife. Several times.

What I saw were some storied franchises being unfairly punished for the sins of other companies, so I tried to take advantage. I bought shares of companies like Kraft and Costco, Apple and Southwest, and after I bought them, they continued to fall (because the investing gods hate me). So I bought more. My crowning achievement, in terms of intestinal fortitude, has to be Yahoo, which I’ve purchased on five separate occasions since the very first announcement that Microsoft was interested in buying them. If you know what the share price was then, you’d probably be surprised to know that I’m actually profitable on the investment (at least on paper) because I kept on buying.

By buying a stock multiple time, you create what are known as tax lots.

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$2.95 a trade.

That’s how much it’ll cost you to make a trade at OptionsHouse.

That’s pretty cheap. TradeKing is currently my go-to broker and they charge $4.95 a trade, 67% more than OptionsHouse. Zecco, which is free if you meet their stringent requirements, is the only one that’s cheaper and they can never seem to get their customer service issues resolved.

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My best investing advice for someone just entering the workforce is to put in an index fund and focus on turning in a stellar performance at your job, day in and day out. Don’t spend time analyzing the market, don’t read about esoteric investments, don’t scrutinize financial statements, don’t listen in on earnings calls, and don’t research SEC filings. Don’t do any of that stuff because you won’t get the same return as if you spent that time knocking your boss’s socks off.

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This is the third and final part of a three part series discussing life as an independent trader. In this final post, Matt offers some precautionary words if you’ve considered becoming an independent trader. If you haven’t been dissuaded after reading about A Typical Day in Life as an Independent Trader or the bevy of Tools of an Independent Trader, it would be wise if you took heed of his words of warning.

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This is part two of a three part series discussing life as an independent trader. This is the second post, covering the tools of an independent trader, written by an independent trader. You may want to first read A Typical Day in Life as an Independent Trader, the first part of this three part series.

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Last fall, Jim and I exchanged the introductory, get to know you, emails about the dangers of being an active trader.

More specifically, his semi-reluctant admission that he had day traded AIG for a quick profit caught my eye since the majority of personal finance bloggers consider active traders to be the blasphemers of the financial world. Thus began the (temporary) downward spiral of Jim’s blogging productivity after we exchanged multiple conversations about trading Yahoo, General Motors, and a few other stocks I suggested he should avoid.

Several days ago, Jim asked for a brief synopsis of what it’s like to be a fulltime trader. I hope you enjoy the post, but moreover, I hope that I convince you that becoming a professional trader is a horrible idea!

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