Archives of “bear market” tag

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How to Trade Through the Pain

  
  Education
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10 painful aspects of trading and what to do about them.

  1. The pain of losing money. (Trade smaller so it is not as painful, it is just an outcome not an emotion).

  2. The pain of being wrong about a trade you were sure about. (You lost simply because the market didn’t match your trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, it’s the market not you. As long as you followed your own plan.)
  3. The pain of a draw down in capital.
  4. Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. (You need to remember your winning trades, your winning years, or your back-testing, or paper trading of the method. You have to keep the faith or get with a method you have faith in).
  5. The embarrassment of public losses. You told everyone who would listen about a great trade you were taking and you were wrong. Social media has given us all the ability to embarrass ourselves anytime we want. (Never be overconfident in any trade, but always be sure of your stop loss.)
  6. The pain of of admitting you were wrong. (Cut your loss and move on to the next trade, trade reality not your ego.)
  7. Losing paper profits, you are up 20% on a trade then a massive whip saw takes back those profits in one move. (Take your trailing stop and move on to the next trade, there is truly no reason to cry over spilled milk.)
  8. You are following a guru and come to realize he truly is a salesman not a trader. (You stop following gurus and look to learn how to trade for yourself using a method and a trading plan).
  9. You buy a super hot stock that you have researched for many weeks then it goes down due to a bear market. (Only trade stocks long in up-trending markets)

  10. You start trading a system that did amazing in back-testing and promptly lose 10% of your account. (You have to stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.)

The Emotions of Risk

  
  Education
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One book that I frequently recommend is Justin Mamis’ The Nature of Risk: Stock Market Survival and the Meaning of Life (1). I believe this book to be foundational to new traders because it discusses, what else?, the nature of risk in the market. What I love about Mamis’ book is the unique way that he writes about market risk, and the way that he juxtaposes two seemingly opposing ideas, that are not in opposition at all. From that juxtaposition he illuminates. (Read on for an example). Given some of the conversation at the Slope, I wanted to do a brief post on some of his concepts from Chapter 6, The Emotions of Risk. I think that some will find some resonance. I particularly wanted to share some of these concepts that might engage your brain into thinking about risk differently. Mamis posits: “Under pressure, emotions determine our action.” (p. 72) Because risk is typically defined as a peril, fear is one of the primary emotions. “Fear is long-term, an underlying pervasive emotion, like the underlying primary trend of a bear market. It doesn’t go away until it changes.” (p.73) Mamis makes a simple, yet powerful, statement about the pervasive fear needed for stocks to go up. Yes, you read that…to go up. For there to be buyers, there must be sellers. And it is the fear of the sellers that creates the proverbial wall of worry to provide supply for those who have a different perception of current market risk. He also notes that the operative portion of fear is anxiety. Anxiety is what paralyzes and prevents you from taking action. It is this anxiety that “gets in the way of taking a risk.” The flip side of fear is the emotion of greed. The operative emotion of greed is envy. Mamis notes that “. . . whereas anxiety paralyzes, envy cause one to act. . . ” It is difficult to see the spectacular trades/success of others, and not feel a small bite from that evil twin of jealousy, envy. Envy can cause very risk behavior which is simply, “the risk of ‘denial of risk’.” Both greed and anxiety often lead to doing the wrong thing. My sense of this wrong thing is “inertia.” : failing to buy when one should buy; failing to sell when one should sell. These emotions and their operative manifestations into our action (or inaction) govern all market participants. The emotional impetus for buyers/sellers is reversed in bear/bull markets. Regardless of the market participant regalia you dress in each day, it is best to understand both your own and others’ motivations and perceptions of the current risk environment. Mamis’ book came along for me when I was feeling ‘inertia’–that inertia having been brought about by the overwhelming need to have more information, more certainty, more sense of direction. Granted, there is nothing wrong in standing aside when there is great murkiness…but my inertia was spanning a time when there was some market direction, but my emotional state prevented my seeing that. Providence must have set this book into my hands, because it helped me come to terms with that inertia. As market participants, we have to balance the two opposing points off view of being free enough to take risk and while not falling into the trap of ‘the risk of ‘denial of risk.’ (more…)

The Secret to Trading Success

  
  Education
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secret1The most important thing you must learn in every market cycle  is where the money is flowing. It is flowing into the companies where the earnings are growing. As long as mutual funds have capital in flows instead of net out flows then they must put new money to work investing in stocks. If you want to make your job as a trader much easier then find where the flow is going. Mutual fund managers can not go to an all cash position they can only move money around. A bear market sinks most stocks because managers have to sell everything to raise money to redeem shares. In an uptrend they have to buy stocks with the incoming money flows. Where does this money go? It goes into the sectors and stocks that are in favor due to increased earnings in a sector and individual stocks that are dominating their sector and changing the world in the process. You want the leaders not the has been. You want the best the market has to offer. Where are consumers dollars flowing into? That is where the money is going. What companies have the best growth prospects? The stock can only grow in price if the underlying company does. Mutual fund managers are the biggest customers in the market when they start buying a stock that increases huge demand and price support.

Your job is to follow the big money, shorting in bear markets, going long in bull markets. Following the trend of what is in favor. Do not fight the action, flow with it.

Quit having opinions and start being a detective looking for the smart money, the fast money, the big money and where it is going now.

You might be a bad trader if……….

  
  Education
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There are young people in the market that are really bad traders and there is also old traders that are very good, but there are no old bad traders in the market because they went broke and gave up a long time ago.

You might be a bad trader if……….

…your primary method is to try to call tops and pick bottoms.

“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”  -Bernard Baruch

 You might be a bad trader if……….

…instead of benefiting from the 200 point run in Apple this year you actually lost money by fighting the trend.

“Cardinal Rule #1 is to sell short only during what you believe is a developing bear market, not a bull market.” -William O’Neil (more…)

Tactical Update From Bob Janjuah: "2008 Will Seem Like The Good Old Days"

  
Analysis, Economy, Education, Global Indices
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Worth Reading :

Plse refer to my most recent comments, from 24th May, and 26th April. Things are playing out nicely. This is just a ‘tactical’ update. In my cmmt of the 24th May I set out 2 possible paths for the new bear market we are in, and I want to clarify a little:


 
1 – 1st, the bigger strategic theme is clear and unchanged  – global growth HAS peaked and the deflation trend is clear for the next 3/6mths. This is strategically bullish the USD and USTs (think 1 vs the EURO, and low 2% 10yr yields). And this is strategically BEARISH risk assets (think mid-800s S&P in 3/6mths, and the iTraxx XO index up above 750bps). The strategic asset allocation outlook STRONGLY favours QUALITY as defined by balance sheet strength, balance sheet transparency (which therefore excludes most financials), market position, AND the ability to be a price setter (not taker).
 
The game changers are: A) a massive turnaround in China towards new stimulus & a new credit creation binge etc – for now very unlikely IMHO; B) a massive  turnaround in corporate behaviour resulting in a leverage, capex, investment, hiring & spending binge – extremely unlike for now and for the rest of this yr; C) a new US fiscal package (pretty impossible now), so the most likely and only really viable remaining option is a MASSIVE DEBASEMENT/MONETISATION move led by the Fed (but no doubt globally co-coordinated) thru the announcement of a NEW (say) USD5trn QE package, aided/abetted by maybe another USD5trn of funny money printing by the BoE, the ECB, ther BoJ, the PBOC, the SNB etc etc………HOWEVER, I don’t expect this last bullet to be used until things get REAL UGLY (see above para for levels). If u know u have only 1 bullet left in the rifle – and unless you are amazingly stupid – u don’t try to shoot the charging grizzly bear when its 50 yards away. No, you wait till its 5/10yards away…WHEN we get this final bullet out of the rifle it had BETTER not miss, as if it ‘misses’ we would then have the mother of stagflationnary busts in history where bonds get crushed due to debasement, taking risk assets out with them too. If this is the outcome – and this is really I think a late 2010/2011 story – then trust me, 2008 really will seem like the Good Old Days…..lets hope Uncle Ben not only has the rifle ready, but also that his scope is well lined up and that he has been practising hard… (more…)

Bear Market Psychology

  
  Education
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“This is my retirement money. I can’t afford to be out of the market anymore!”
“I don’t care about the price, just get me in!!”
“It’s a healthy correction”
“See, it’s already coming back, better buy more before the new highs”
“Alright, a retest. Add to the position – buy the dip”
“What a great move! Am I a genius or what?”
“Uh oh, another selloff. Well, we’re probably close to a bottom”
“New low? What’s going on?!!”
“Alright, it’s too late to sell here, I’ll get out on the next rally”
“Hey!! It’s coming back. Glad that’s over!”
“Another new low. But how much lower can it go?”
“No, really, how much lower can it go?”
“Good Grief! How much lower can it go?!?”
“There’s no way I’ll ever make this back!”
“This is my retirement money. I can’t afford to be in the market anymore!”
“I don’t care about the price, just get me out!!”

I Say Lower Rates Below 0%!

  
Analysis, Education
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Richard Russell can write:

“The big advance from the May 2009 lows was a bear market rally. The good economic news of the last few months were a mixture of hopes, BS government statistics and rosy propaganda from bleary-eyed economists and the administration. There’s no point in my going over all the damage — the plunge in the NASDAQ, the crash in the Stoxx Europe 600 Index, the smash in the Morgan Stanley World Index, the gruesome fact that at 1071, the S&P 500 is 24% below its level of ten years ago. The damage in dollar terms is reported to be $5.3 trillion. That sounds to me to be a sh– load of money. And the tragedy is that our government has spent two trillion dollars in a vain attempt to halt or reverse the primary bear trend of the market. I said at the beginning, “Let the bear complete his corrective function.” One way or another, it’s going to happen anyway. Better to have taken the pain and losses — than to push the US to the edge of the cliff. Now with the stock market crashing, the national debt is larger than ever. In fact, it is so large that it can never be paid off, regardless of cut-backs in spending or increases in taxes. Had Obama or Summers or Bernanke understood this, they never would have bled the nation dry in their vain battle to halt the primary bear trend. As I’ve said all along, the primary trend of the market is more powerful than the Fed, the Treasury, and Congress all taken together. Our know-nothing leaders have boxed the US into a situation that is so difficult that, for the life of me, I don’t see how we’re going to get out of it. Well, there’s always one way — renege on our debt. Can a sovereign nation renege on its debt and in effect, declare bankruptcy? Sad to say, I think we may find out. One basic force that the world will have to deal with is deflation. This is the monster that Bernanke is so afraid of. To fight inflation is easy — you just raise interest rates and cut back on the money supply. But deflation is a totally different animal. Interest rates are already at zero. The money has been passed out by the trillions of dollars. The stimuli have been issued. What can Bernanke do in the face of deflation?” (more…)

Follow Trends

  
Analysis, Education, US Market
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From Richard Russell:

Primary trends can be likened to the power of the ocean tides. Build a sand castle against the ocean tide, and the first wave will wash your castle away. Build a cement wall against the tide, and in a matter of years the cement wall will be reduced to sand and rubble…primary trends, one way or another, go to completion. Or to put it another way, a primary trend will go to completion, no matter what..I said from the beginning, “let the bear market fully express itself.” One way or another it will express itself regardless of the wishes of Washington or the Fed or the Treasury. Interfering with the primary trend will just drag out the situation and make it worse — it will be turning a menace into a Frankenstein…According to Dow Theory, neither the depth nor the duration of a bear market can be predicted in advance. In this bear market, the Dow could fall to 4,000 or 400. I honestly don’t know the answer. In my experience, primary trend tend to carry further than anyone expects. I do know this — yesterday the following broke below their June lows — the Dow, the Transports, the NYSE Composite (which includes ALL NYSE stocks), the S&P Composite, the NASDAQ and the Russell 2000. Any way you look at it, that’s bad action. Maybe just as bad, new lows on the NYSE surged to 164. Hundreds of stocks are breaking down, and even more are hovering just above their 52-week lows. The lower depths of this market are opening up like a giant graveyard. It is said that in a big bear market, stocks return to their original homes — Wall Street.”

Can it happen? Yes. Does anyone know for sure? No. Follow trends.

Jeffrey A. Hirsch , The Little Book of Stock Market Cycles-Book Review

  
  Education
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Jeffrey A. Hirsch is best known as the editor-in-chief of the Stock Trader’s Almanac. He draws on the extensive research behind that yearly publication for The Little Book of Stock Market Cycles: How to Take Advantage of Time-Proven Market Patterns (Wiley, 2012). 
Let’s get Hirsch’s most controversial call—that the Dow will reach 38,820 by the year 2025—out of the way right at the beginning. He claims that this “is not a market forecast; it is an expectation that human ingenuity will overcome adversity, just as it has on countless past occasions.” (p. 66) The operative equation is “War and Peace + Inflation + Secular Bull Market + Enabling Technology = 500% Super Boom Move.” (p. 67) But don’t buy that magnificent villa overlooking the Pacific or the Ferrari you’ve been coveting just yet. “[A]fter stalling near 14,000-resistance in 2012-2013, Dow 8,000 is likely to come under fire in 2013-2014 as we withdraw from Afghanistan. Resistance will likely be met in 2015-2017 near 13,000 to 14,000. Another test of 8,000-support in 2017-2018 is expected as inflation begins to level off and the next super boom commences. By 2020, we should be testing 15,000 and after a brief pullback be on our way to 25,000 in 2022. A bear market in midterm 2022 should be followed by a three- to four-year tear toward Dow 40,000.” (pp. 67-68) In brief, if Hirsch’s scenario plays out, we’ve got quite a wait for the market to catch up with our dreams.
The bulk of Hirsch’s book describes the most effective market seasonalities. Take, for instance, the presidential election cycle. Since 1913, from the post-election year high to the midterm low the Dow has lost 20.9% on average. By contrast, from the midterm low to the preelection high, the Dow has gained nearly 50% on average since 1914. (more…)

Respect the Trend

  
  Education
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respect-21One of my favorite trading tales involves a very wise, veteran trader who, when asked his thoughts on the market, would simply respond by saying “It’s a bull market,” or “It’s a bear market.” Younger traders simply seeking out a hot tip from the seasoned pro would often leave discouraged – or even annoyed, believing they were being fed a line. JL himself didn’t understand until years later the wisdom that was actually being dispensed with those words: The veteran was simply relaying the path of least resistance, or the trend for the general market, and therefore giving the trader an incredible edge in determining one of the many variables that makes up stock trading. (more…)

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