Over the past several months, I have received a number of emails and heard from many traders how hard they consider the markets have been to trade. In talking to others, I have heard many sad tales about significant losses. In a sense, these complaints echo those I heard when the markets turned south in 2000. I always try to ask these folks what they are doing in the markets and the answer most often is that they are buying stock or taking bullish positions. The problem, of course, is that the markets have been decidedly bearish in general and unless a trader was focusing on oil and energy, the chances for success weren't very good. Markets are going down because most of the stocks in that market are going down so why be surprised that we lose if we are playing against the market?
I am convinced that most people are bullish by nature or training. The consensus, wrong though it may be, seems to be that we need to buy stock or directional options to make money in the markets. I once knew a man who literally made millions in a few short years trading the markets only to lose it all when the tech bubble burst. Of course, there were many reasons why he went broke including failure to manage money and failure to discipline his trading, but most importantly, he refused to do anything but continue to make bullish plays as the market turned more and more bearish.
It is fine to be bullish, but my suggestion is that if you are bullish by nature and only like to make bullish plays, then stand aside when the market turns bearish. Going to cash and just watching when a market is bearish is a lot better than watching our assets melt away as we try to pick the bottom.
There are many ways to make money in bearish and sideways markets. I discuss several of those ways in my book, "Trade Your Way to Wealth". In Appendix D to that book, for example, I specifically set out bearish and neutral strategies along with the bullish and describe things like their relative risk, capital required, time likely to be in the position, potential rewards, etc. However, just because those strategies are available doesn't mean everyone knows them or knows how to use them. If you are among those whose bent is bullish and who neither knows nor cares to use bearish strategies, the best strategy is probably to stand aside until the bull returns.
Awaiting the return of the bull requires patience and many would-be traders are very impatient to say the least. Patience, though, is a great asset for a trader. Rather than rushing in to catch the falling knife as so many do, how about waiting until a bullish move is confirmed and then invest. That certainly seems better to me than watching the portfolio race toward zero.
As the paid subscribers are aware, I have been addressing the bearishness for months now, and, in the bullish services have sent out many fewer alerts than when the markets were moving up. My efforts for the bullish services have been to try to find the occasional position that looks like it has reversed up and get in with a reasonably tight stop in case I am wrong on the direction. In general, though, I have spent much more time "standing aside" than I normally would in a bullish market. During the same period, the Option Trader service has had more trades simply because of the ability to make bearish and neutral trades.
The markets or a stock can only go one of three ways -- up, down, or sideways -- and there are strategies for each, but we have one other option available when we are unconvinced about direction or just uncomfortable with a market; we can stand aside and wait until we find the conditions we like. It may take time and require patience, but it is better than the alternative.
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
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