Trader Superstitions Can Sometimes Make Sense

As a young trader at the Chicago Board of Trade, I recall how many of the floor locals wore the same dirty, greasy ties day after day until they were almost shredded, especially after a winning streak of successful trading. Others walked into the building through a particular entrance or always used a certain type of pen. Everybody had their "thing."

And although I've long since left the floor, I still have a morning work routine that, if not followed, can throw me completely off my game. I get up early; review the day's news (in the bathtub) and drink coffee in a precise fashion before getting going. I follow the same route day after day after day. The fear, albeit totally absurd, is that if the schedule isn't followed, I'll likely have a losing day. Sound strange? Maybe not — we've all got a few of our own.

Why do we engage in such fantasy? Chalk it up to the pressure. There are few other lines of work that involve such endless, unrelenting uncertainty as investing. Regardless if you're simply buying bonds or trading option volatility, investing comes down to dealing with the unknown. Superstitions, the little rules we enact for ourselves, provide a sense of security and control in an environment where neither exist. Like Linus van Pelt's security blanket or a runner's favorite shoes, these devices give us the illusion of safety, certainty and control.

Many of my superstitions involve financial media. For example, there's a particular television commercial selling gold coins that I won't watch; I'll literally turn off the TV when it shows and turn it back on a minute later.

Yet some aren't as useless as it might seem. For example, as I wrote last spring, I'll go to great lengths to avoid watching or reading any traditional financial media — especially those which involve stock tips. Obviously, a large part of that behavior is irrationally motivated: Nothing is materially going to change because I watch Maria Bartiromo for a half hour after work one night. But it does serve a productive purpose: The more financial media I ingest, the more likely I am to be unwillingly influenced by something other than the market itself.

My biggest superstition comes on those rare occasions when I actually have a winning, open trade. Although I might be bubbling over with excitement and anxious to share my good fortune with the world, I do my best to keep my mouth shut. I certainly don't brag or get publicly cocky.

Why? From Amaranth to Goldman Sachs's (GS) Global Alpha, nobody is bigger than the market. And as bizarre as it might seem, I do believe the trading gods are always watching, listening, and waiting for me to get cocky about my positions. As soon as I start boasting about how much I've scored in XYZ, as soon as I get a chip on my shoulder, someone is always hungrily waiting to knock it off.

Realistically, I know it's an unfounded superstition. The value of the Mexican Peso (FXM) isn't going to rise or fall based on my mention on Cavuto. But again, this superstition has a practical use. Overconfidence is more than a little dangerous; it's the cocky investor that's usually too stubborn and dogmatic to alter his approach when conditions change.

When I brag to a client or co-worker about the great success I've had in XYZ, I'm subconsciously reinforcing feeling confident and accomplished with holding XYZ. That leads to compromised decision making down the line. When XYZ reverses and prudence would suggest you exit the trade, I can't help but be unduly influenced simply because I'm "on the record" as being a bull. "I can't sell it now" goes the logic. "I already told Uncle Joe how much money I had made in it." The more we boast about a trade, the more likely we are to be unconsciously attached to it.

Investment superstitions are the small rules we make to give ourselves some semblance of order and control. Most tend to be irrational and meaningless, only providing a familiar regularity that helps us feel safe. If they can serve a greater purposes, such as reinforcing good discipline or proper trading technique, so much the better.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.