The bears have taken complete control of the markets and all the long term investors are running for cover. They have witnessed most of their capital being eroded right in front of their eyes. The wealth that these investors have accumulated over a period of decades is being washed away in a period of just a few years, which exemplifies the astute nature of the markets in taking away all that it gives in less than half the time with nonchalant ease. Of course, there are the big investors who own portfolios worth crores and are living off the dividends offered by their holdings, but again that does not mean that their portfolios haven’t diminished in size or that they can remain insulated from the current downtrend. They too must be experiencing sleepless nights because of the sheer pace at which they can see their net worth dwindling.
Some of these investors are so attached to their holdings as if they are married and even the thought of selling those stocks could lead them to a nervous breakdown. These are the people who are unwilling to change and they very likely run the danger of being run down by the markets because of their inability to adapt to changing market trends. Being concurrent with current market trends and conditions is an integral trait of a good investing strategy and any deviance in this regard could lead to catastrophic consequences.
The multi baggers of yesteryears are begging the markets to relent but the markets have treated them with equal or perhaps more disdain and the all time favourite stocks are turning out to be cancer cells while people finally realize only when it’s too late.
If past precedents are to be relied upon, then this recession might last 8 years; and considering that it all started in 2008, we still have a good 4 years to go. So, the writing on the wall is clear and simple. Run, run before it’s too late and you are in such firm grip of the bear that befall of death becomes certain. It’s time for one and all to wake up and smell the coffee, before it’s too late.
Trading and only trading as a stock market strategy is an idea whose time has arrived.
But again the question is, ‘do you know how?’
And as I write this post the stock market has hit a 28 month low and Indian markets have lost the trillion dollar market status.
All this exemplifies that we are vindicated when we choose to follow market trends and behave exactly the way market wants us to behave. Also, investors must realize that they cannot and should not try to emulate the big institutions for the simple reason that institutions work on a totally different time horizon and with objectives that are totally diverse from ours. So, you can see so many so called experts recommending buying as they feel that the markets have bottomed out and the bleeding has supposedly stopped while markets continue to slide. And institutions have the capability to average at various levels because of the sheer size of capital they possess.
These traits can certainly kill a small time investor who has very limited and vulnerable capital at his disposal. For example an institution can witness a 50% downside in a stock and average all the way down but the same technique can prove disastrous for a small time investor.
So, we know that trading following market trends is the best thing for common people like you and me. The following charts clearly demonstrate the significance and validity of this point.
An 800 stock goes to 400 and the same stock falls to 200
Similarly, a 200 stock goes to 100 and the same stock can fall to 40
The current market scenario suggests that the bears are out in full force and the bulls are tired and need some rest. It might be only a matter of time before the bulls get up and start charging all over again. Till such time, we need to spare them.
In effect, if you can filter the noise from the markets and focus on trading the best trending stocks during that time, then there is very little that can stop you from making it in the Stock Market.
Strong Psychology and Sound Money Management can get you there. And the last thing you need is a Good Trading System.
I believe the biggest problem encountered by the masses, the ones who follow herd mentality in the financial markets is the challenge of predicting the movement of the markets and its components. It is one’s ability to correctly foretell market movement that is considered to be the sole ingredient to attain any discernible advantage over the market. Of all the myths and misconceptions that inhabit the minds of average traders, I believe this one has to be the most paradoxical.
It is this innate human nature that afflicts so many people with prediction syndrome. The large populace of people want their futures predicted, they want future events to be predicted and anything that is remotely unpredictable or uncertain leaves them unsettled and nervous. People flock those who presumably have a gift of clairvoyance to know if they can really peep into the future and actually predict it.
This is more true in the stock market than anywhere else where all and sundry waste most of their time trying to predict market movements. These people not only do not understand that it is impossible to predict market movements but even attempting to predict can be extremely dangerous for their investments. I fail to understand why is it so difficult to just follow the market? It is the failure on peoples’ part to take market at face value and on the contrary have contradictory opinions that often leads them to despair. If the market declares that it is going up, then why do you want it to go down and vice versa? It is not important to know where the markets are headed; rather it is important to know what you are supposed to do when it gets there.
But, believe it or not, the ability to predict or envisage correctly the next move of the market more often than not is more dangerous than not being able to.
Let me explain why:
If one is able to predict the next market move correctly 90% of the times, then it is exceedingly probable that the said person will stake much more of his capital than a person who is unsure of where the markets are headed. Let’s say you are on a road trip and you encounter a zigzag winding road. A person who is unfamiliar with the road will obviously slow down and be much more circumspect with his driving. Whereas, the one who has driven the same road a number of times will have a feeling of exaggerated confidence in his ability to traverse the road with a considerable amount of ease. So, the problem is that this person drives faster than he should and secondly he thinks that he knows where exactly the road will turn next. Both these actions of his will leave him in serious danger of harm because if he encounters one wrong turn, then he may not be able to negotiate it due to the speed and over confidence with which he is driving.
These people who can nearly accurately predict market movements are in significant danger because they feel they have a sense of control and are not adequately prepared if the market presents them with the wrong turn and gets even with them. They are caught off guard and stand to lose much more than they would ideally be prepared to lose.
So, my question to you is, why do you want to predict? Why do wish to have an opinion over which you have negligible or no control? If the market does not care for your opinion, why do you care to have an opinion on the market?
And for all you know, the essence is, you are supposed to follow the markets and not lead. So, learn to follow and not try and lead. You will hold yourself in good stead, for the markets love those who follow them and despise those who try to outsmart them.
What you need to do is, turn ‘Addiction of Prediction’ into ‘Dereliction of Prediction’.
Times are changing, so are the moods. The global economic situation today represents a giant python and all and sundry are just mere spectators waiting to see where it turns next and who it gobbles up as its next victim.
There is complete pandemonium as the US loses its high ground as an economically intellectual state and all other major economies dangle on the edge to crumble like a pack of cards. The growing economies cannot remain insulated and are bound to be embroiled in the ensuing havoc. The impact of these events on the financial markets is evident from their behaviour which exhibits utter and total confusion. World investors and traders are resonating bewilderment in their understanding of the current economic situation and its complexities and how it is going to impact their investments.
I believe the hardest hit, are the traders because they are essentially devoid of patience unlike investors who are known to bide time till things go in their favour. Financial traders are an impatient lot because their objective is to make money at every corner of the move and when markets become non-conducive to trading, they often become disconcerted and immediately look to switch gears or switch markets. They tend to get perturbed way too easily and are just not willing to accede to current developments. Some traders that I know of often jump from trading Stocks to Commodities to Forex and so on and so forth. When they witness a particularly bad frame of time in a particular market, they often switch in their attempt to avoid the devil. But soon enough they realize that they have encountered the devil’s cousin, the next one is no better than the previous one. During bad times, the Commodities and Forex markets can be as severe on your investment as the Stock Markets and there are no financial markets in the world which can be described as low risk. Trading as an activity is high risk and the levels of risk do not depend on the market but on your risk management capabilities.
That is precisely the reason why we find millions of jacks in trading and so few masters. Traders seldom look to master one art or style of trading and very few stick to a market to understand the intricacies of that particular market or style. Just like investors endeavour to unearth that one stock which will propel their investment skywards, traders are constantly in pursuit of that one ‘Holy Grail’ system which will solve their predicaments forever. They wish to unravel market mysteries and decipher market movements; they are all the time on the lookout for that one system or software which would be good enough to outsmart the markets more often than not and subvert their discomfiture once and for all.
Even today I come across so many hardcore traders moving around with an intuition that one day they will stumble upon a magic wand which will turn their trading fortunes around. They go around spending money on every other trading tool that is available, where as they are reluctant to offer the same money to the markets as tuition fees. I am flustered to think that many people do still believe that such contrivance exists. They want to be right most of the time rarely realizing that the odds are always stacked in the markets’ favour and it is not merely difficult but impossible to beat the market at its own game. True, there may be sporadic events when almost about everything goes in your favour, but then if you are ready to blame the markets for your undoing then why shouldn’t you be grateful to the markets for being kind. Why the change in perception that you have been able to beat or outsmart the market?
The markets are in a derelict state today with most traders being content to abandon the markets searching for greener pastures. The markets can be generous if you can be patient.
There are still others who know how to trade declining markets. They understand the markets for what they are and are willing to treat the markets at face value. For them, the show is still on. They may lose the Battle, but they will certainly win the War.
All those following and/or trading the Indian Stock Market for the last 1 year would agree that the market is just not what they expected it to be and is trying the patience and endurance of all involved. It is a time when traders are developing withdrawal symptoms and more people are throwing in the towel with each passing day.
Just what is it with the market that it fails to give direction and behave so unusually? The question is whether the market is really abnormal or is this ‘New Normal’ for the market. For, if this ‘Irrationality’ is the ‘New Normal’ for the market then it can continue to behave like this for as long as one can imagine and suck the blood out of traders/investors and leave them bleeding. With technical analysts and softwares becoming more and more common; it is perhaps the market’s way of getting even with them and showing them the door before it decides to take flight. When a trading technique becomes popular, widely accepted and employed by traders, the smart money always finds a way to make the techniques obsolete and redundant. Perhaps the market is doing to technical analysts what it once did to fundamental analysts; that is throw all their theories out of the window.
The macro economic situation is not helping the cause either, with countries on the brink of sovereign defaults. The US is reeling under a pile of debt which at one point of time will become unassailable and the once economic engine of the world is reduced to a nation looking for options, when none exist. What we are essentially witnessing is a shift of power from the developed to now developing countries and these shifts are neither easy nor smooth. It takes time for the world community to realize and further accept that a ‘New World Order’ is emerging and that change is now only a matter of time. What we shall witness in the times to come is the sort of event that a generation witnesses in centuries, in that sense we will be the fortunate ones to be a part of history.
India, on the other hand is having problems aplenty with the civil society agitation threatening to snowball into a fully fledged civil war against corruption and black money and the government displaying an absolute state of anarchy where the General is no longer in a position to control his own soldiers.
How big an impact this will have on the markets and for how long is a matter of speculation. The so called experts can continue with their aggrandized confabulations and eat into prime television time and newspaper space, but the fact remains that no one, yes no one has the slightest clue on the next move of the stock markets. Many live under the delusion that the markets should remain rational and they, as traders can behave as irrationally as they would wish, whereas the pragmatic thing to do is behave rationally themselves and let the markets behave as irrationally as the markets wish.
The rise of the Commodities & Forex markets are providing fresh investment options to traders and it is only a matter of time before people switch loyalties. Commodities have offered phenomenal returns in the past 1 year when the Stock Markets have only managed to disappoint and disillusion the traders, in particular and the public at large. The essence of the Stock Market is public participation and with dwindling volumes, it is amply clear that traders are fleeing the markets like school children at the closing school bell. So, does that mean that the markets are ringing their own death knell by this kind of behaviour? Because what the markets need to survive is money. The masses bring in the money that smart money feeds on, and it seems that it won’t be long before markets elicit public participation. All we need to do till then is hold on to our horses as hope floats on thin air.
In these trying times, for one to think that this could be the end of my trading career in the Stock Market, is a fool’s errand. What one could miss in the bargain is beyond imagination.
Hong Kong Stock Exchange
Singapore Stock Exchange
National Stock Exchange, India (Nifty)
The Asian Markets except for a few like Kospi are behaving quite erratic and irrationally for last 7-9 months. It has been quite some time that traders and investors have seen any headway or growth in their portfolios. In fact, the converse is true and many have seen their capital depleting by 10-15% in many cases and as much as 20-30% in some.
There is an old adage in the market which says that “The markets can remain irrational longer than you can remain solvent.” There is another adage which says that “Losses like wolves, hunt in packs.” So you don’t usually get just a few losses but you get a series of losses, left, right and centre”
So with each loss, you take more and more risk on your next trade in order to recover more and more losses. Now, stand in front of the mirror and try telling me that this is not true. At some point of time you are as irrational as the market itself, you frown upon the very idea of trading the Stock Market. You are beaten, battered and bruised.
It is like walking down a dark, blind alley with no end in sight. There are three things that can happen here;
1) You are so scared and gripped by fear that you are totally paralyzed and you cannot even move and you stand there not knowing what to do and waiting for help to arrive, which may or may not come.
2) You are scared but you somehow manage to muster the strength to run, and you run so hard that you are not even looking around, you just want to get out of the god damn situation because the promise of getting out of a bad situation seems so alluring to you.
3) You fear the situation and at the same time you are allured by the promise but you manage to control your fear and also the greed and you continue walking quite normally knowing well that a good turn, out of this blind alley is just around the corner and it is just a matter of time before you will be out of the bad situation.
For me, a rationale person would be one who falls in the third category of people. Similarly, a rational trader would be one who does not fall prey to market intimidation and does not react adversely to the situation presented before him/her. For a rational trader knows, ‘my next big profit trade is just round the corner.’
Till then, just fight. And fight well my friends.
When investors buy shares, what they are essentially doing is that they are becoming shareholders of the company. The idea is to buy a very small percentage of the company’s stake with the objective of becoming a part of the growth story. So, when investors invest in companies with the overall view on the future growth projections of the company, they become a part of the company. In a way, they become stake holders. For this, they need to thoroughly investigate the company’s profile, its business, the management, future prospects, assets and liabilities and so on and so forth. This type of investment is best suited to the institutions as they have the resources and the manpower to do it for them. But it is not remotely possible for individuals like you and me. As a result, many so called long term investors try and emulate the institutions by trying to behave like them. What they don’t understand is that the institutions are sitting on cash; hordes of cash which is not the case with individuals. Institutions can afford to lose their entire capital in a particular company because of their highly diversified nature, which again can spell doom for retail investors.
Investment also offers retail investors the comfort of holding on to the losses without booking the notional losses thereby giving a feel good factor that they have not actually lost because they have not yet booked losses.
In that case the best thing for individuals to do is to trade. But what do stock traders trade? They neither trade a commodity nor a service. Stock Traders actually trade risk. When traders buy a stock, they are buying certain amount of risk. The idea of trading smartly and thereby profitably is to keep the risk to a level which is both acceptable and sustainable in the long run. But the problem is not so much of identifying the level of risk; the problem is to stick to the risk which you had anticipated at the time of making the trade. Because if you do not sell at the time your capital has reached the threshold level, then you are subjecting your capital to more risk than anticipated. The reason most traders are not able to sell at cut loss is because of what Psychologists call the ‘Risk Aversion’ which is the tendency to avoid a loss when you see it coming. People try and avoid losses and to do that they come up with all possible excuses not to sell. They either move their stops or plainly ignore the signal when it comes, thinking that it is a temporary dip in the market, the market will bounce back, the stock jumps back up after I sell and God only knows how many more reasons one would think of for not selling. This ‘Loss Aversion’ is the No. 1 reason why traders are not able to cut their losses and exit and instead they hold on to their positions hoping for the best but never ever expecting the worst.
One important factor that desists people from taking a loss is the fear of losing their entire capital to a string of losses. This phenomenon of losing the entire capital is called ‘Risk of Ruin’. There are a number of traders, many seasoned, who believe that if they are caught in a web of a series of losses then they might end up losing their entire capital and consequently face the Risk of Ruin. But what most people don’t know is nobody has ever gone bankrupt cutting losses. Cut loss is in fact the only way for a trader to ensure that he never goes out of the business of stock trading and you can invite the ‘Risk of Ruin’ if you don’t cut loss and a single trade can draw the curtains on your trading career.
So, if you are not cutting losses, you are breeding an opponent which has the potential to kill you. As we at T3B always say “Kill your losses before your losses kill you.”
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Quote of the Week
“Success doesn’t come to you, you go to it.”
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