Ever since I began trading I have encountered many statements seemingly made with great certainty. I have heard people say that a specific stock price is going to jump up on the earnings announcement. It didn't. I have heard people say that the only way to make money in the markets is to buy and hold. It isn't. I have heard people say that no trader can make money trading. That's just not so. Maybe the one saying that takes the cake is "It's going to come back."
The truth is that little, if anything, is certain in the markets. A few things that seem to be pretty close to certain are:
I have an unconfirmed suspicion that those whose personalities work in terms of beliefs in market certainties like "it'll come back," or "there is only one way to make money in the markets and that's to ....," or "there is no way anyone can make money trading" are less likely to be successful than those who simply accept that there are no real certainties. Of course, I am speculating and many may disagree, but I am guessing that those who pronounce "certainties" may be too rigid to accept the vagaries of market movement and may have difficulty in seeing alternative ways to deal with situations. Again, it is just my speculation, but I believe that those who are less rigid, who are able to reverse positions or who are willing to adjust strategies when they encounter a changing or unpredicted situation are more likely to succeed in the long run.
A "buy and hold" investor, for example, is bullish by nature. Essentially, their argument is that if they buy stock in a fundamentally sound company, the stock price will go up over time. Over what time is not ordinarily defined, but from a long term historical perspective, the argument is sound though it certainly has many exceptions. For example, if we look at the Nasdaq Composite (COMPQX) we see that it is up relatively substantially since its low in 2002, yet it is nowhere near its high in 2000 and it is currently trading at approximately the same level as it did 10 years ago in 1998. The results, therefore, for a "buy and hold" investor would be quite different depending upon when they made the decision to buy.
Would it be worth the trouble to learn to trade the market in both directions? An investor could have traded bullish strategies on the COMPQX as it rose from 1994 to 2000 and then traded bearish strategies from the break in 2000 until 2002 or 2003 and then climbed aboard the bull again into 2007. The whole move up from 1994 to 2000 was approximately 4300 points; the move down from 2000 to 2003 was about 3750 points and the move up from there to the present about 1200 points. While the bullish buyer in 1994 would have about an 1800 point gain today, the trader who used strategies to trade both directions, even if he captured only 50% of the moves would be up over 4600 points over the same time. Certainty that buying and holding is the only way to go could have been costly in that scenario.
Please understand that I do accept buy and hold as a very viable strategy. I just believe there are many other strategies, including ones to benefit from bearish moves, that might be worthwhile for each of us to consider. In "Trade Your Way to Wealth," my recent book, I examine a number of these strategies and emphasize the importance of money management and risk control. Understanding and using these concepts may very well add to your trading abilities if you are willing to accept the proposition that certainty in the markets is, most often, illusory.
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
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