Saturday, March 07, 2009

What Does It Look Like

Perhaps the second most frequent question I am asked (right after how do I find a stock) is what do I think the market is going to do. When I answer, I want to avoid rudeness yet the simple fact is that whatever I may think the market is going to do is completely irrelevant at least in the sense that the market simply does not care what I think. If I think it is going up, that doesn't mean it will go up and if I think it will go down, it doesn't mean it will go down. Of course, the phenomenon doesn't apply just to me. It applies across the board. I am fascinated by how often I hear diametrically opposed opinions from various talking heads on the TV stock market shows. Their opinions may make for wonderful entertainment, but they should not be relied upon as trading gospel. It is not unusual for one prognosticator to predict a specific stock is set to move up while 15 minutes later an equally credentialed guru is adamant that it will move in the opposite direction.

Years ago, I remember an exercise on a TV show where a chimpanzee picked stocks against an analyst and actually did marginally better. Is all this to say that success in trading is luck alone? Certainly not. There are a number of principles that can lead to success even when what we may think might happen doesn't. As an example, take the old saw: "the trend is your friend." Anyone who traded based upon that adage and made bearish plays since the latter part of 2007 probably did quite well. Anyone who traded and didn't pay attention to the market direction probably has suffered significant losses.

I am primarily a technical trader so I rely upon what I am seeing the market do. Part of my plan is to try to trade the direction of the market, the sector, and/or the stock. I do not pay as much attention to fundamentals as many investors might since I have learned that simply because it is a good company does not necessarily mean it is a good stock. General Electric (GE) may be a great company, for example, but its stock has fallen from $60 in 2000 to under $7 in March of 2009. I don't mean to suggest that there aren't fundamental reasons for the dive -- there are. What I mean to say is that I can look at a chart of GE and see how it broke below major support (what used to be a floor) back in early 2008 and signaled a time to get out to technical traders. Could I have been wrong? Of course, but if I followed the signal and got out I could always have gotten back in if it broke back up through resistance (the new ceiling).

The point of the last paragraph is that traders and investors need discipline and self-imposed discipline is very difficult without some device to guide us. I use lines on a chart. I don't contend they are perfect because they aren't, but they definitely work better than that little voice in my head that may say hold on a little longer, it will come back.

Predicting is a highly improbable road to success in trading and investing as so many have found out in these difficult times. Discipline, money management, exit strategy, a trading plan, and the acquisition of knowledge are much more likely to lead to success.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

13 comments:

Anonymous said...

Just got your 1st book and am enjoying reading it as I do your weekly blog. I'm hopeful that i can trade with wisdom as you appear to have done. So what's the market gonna do? (jus kiddin)
Maurie Deming
mademing@yahoo.com

Ray said...

thanks for your great advice!

do you utilize SDS & QID when your trends indicate a downward path and
SSO & QLD on the way up?

appreciate your comments on what I believe to be the simplist of all investment strategies for todays market.

Ray

koehlerray@aol.com

Anonymous said...

I am coming up on my frist year of trading and the hardest task for me is to maintain the discipline to stick to the trading rules that alot of traders live by like sticking to your stop-loss targets and properly managing risk on a consistent basis. If I would have adhered to my stop-loss rules that alone would have substantially decreased the amount of money I have lost this year. Great insight in this article. The gurus trying to predict this markets bottom has showed how difficult the task and nobody truely knows where this market is heading.

Anonymous said...

Relax, just go to: http://www.nasdaq.com/reference/BarChartSectors.stm Let me know what you think of my suggestion at: MADEINUSA@RCN.COM

Anonymous said...

Is anyone watching CTIC? I've been following their progress for months. They currently have 2 new cancer drugs ready to be approved in April. They are currently changing over from a research company to a pharmaceutical compamy. They intend to market both these drugs upon approval next month. I have a feeling their stock is really going to pop.

Donato said...

Regarding CTIC . . . Did you even read the article above? If so, you may want to read it again.

If you decide to buy, be sure you use money that you don't need for anything else in life. After all, even a blind squirrel can find a nut once in awhile. And maybe you to will get lucky!

Anonymous said...

Great read thank you !!

Bill Kraft, MarketFN.com said...

Thank you for getting "Trade Your Way to Wealth," Maurie. I'm happy to hear you are enjoying it. I hope it helps you in your trading.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for writing, Ray. I do use the short and ultrashort ProShares like SDS, DXD, and QID when it looks like markets are falling. As with any play, there is risk, and the risk is multiplied with the ultrashorts so I try to keep a tight rein on them.
Bill Kraft

Bill Kraft, MarketFN.com said...

Great points, Anonymous. Following a disciplined plan is very difficult, at least in part, because our emotions can be so strong when we are trading. As you point out, using stops can drastically reduce losses and that is one of the first objectives traders need to meet on the way to success.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Anonymous. The Nasdaq sector ratings are one of many very helpful devices for traders who are interested (as I am) in trading with rather than against the market and sector direction. Thanks for pointing the site out to our subscribers.
Bill Kraft

Bill Kraft, MarketFN.com said...

Anonymous, while it isn't my practice to comment on subscriber's suggestions about stock, I do want to say that stocks like CTIC can be extremely dangerous. While small drug and biotech companies can sometimes do serve up home runs, they often simply fail. Obviously, I have no idea which way CTIC may go, but from your email it sounds as though the company is completely dependent upon FDA action and you don't mention what phase testing they are in with their drugs. From the technical point of view, I see a stock that has fallen from over $2700 a share back in 2000 to $0.06 this morning. At the moment there is barely a heartbeat. All I can say is that this one is HIGHLY speculative.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for writing, Donato. I agree.
Bill Kraft