Making money in the market is an unnatural act. We humans are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old, but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment. In the market, this means that if a stock has gone up, you believe it will continue. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability, while others can only learn it through decades of training.
The current market is unique. It has never been so volatile; therefore the danger and the opportunities have never been so plentiful. No one has ever traded in such market, so past knowledge and experience may only be a hinder to adopt faster in the new environment. No system is profitable all the time and traders with 20+ years of profitable track record are in the process of realizing that. In time of extreme changes survives the one, who is more flexible, not the stronger one.
Conventional wisdom will bring you only losses. You have to learn to think out of the box. Conventional wisdom says that in bear markets you should be only short or neutral. In case you absolutely have to have long positions in your portfolio, you should choose among the stocks with highest relative strength – the ones that somehow managed to weather the storm. Wrong.
Market is so volatile that it takes stops out on a regular basis, shaking out both long and short swing traders. Percentage stop losses don’t work in this environment. If you are going to survive and thrive, you need to decrease your trading horizon and the size of your trading. I remember that about a year ago, I found out that many, who were swing traders at the beginning of their careers at some point switched to day trading. I wondered why and started asking questions.
Markets are made from people. In theory everyone could be profitable if there is a continuous flow of fresh money into the market. Recently this has not been the case. Someone has to lose. In order to be profitable you need to follow a very simple rule – to buy only what you could sell later at higher price and to sell short only what you could buy later at lower price. Like the owner of a small shop, you should not buy inventory that you personally like, but stuff that could easily be sold this season. Yes, stock traders are in the retail business and their products are called stocks. I realize how unscrupulous such way of thinking may sound and that it contradicts the initial purpose the market were created, but this is the reality.
Initially markets were created:
- To offer an alternative exit strategy (therefore motivation) for entrepreneurs;
- To provide new means of cheaper financing for business’ expansion;
- To allow ordinary citizens, who don’t have the idea, the will or the necessary capital to start their own business, with the opportunity to participate effectively in the economic growth of the country/the world.
All those things don’t matter anymore. Markets have long turned into a speculation arena, where everyone tries to outsmart the other.
1) Uncertainty is always subjective. It is a state of mind that is derived from a mix of objective data, emotions and personal experience. To say that the market is always equally uncertain is to say that mood is always the same. It is not. It constantly changes.
If the perceived uncertainty is always the same, earnings reports would not have such huge impact on prices. We all know that this is not the case. In many cases, earnings reports provide new data that changes market expectations and therefore prices. Options premium is higher before earnings exactly because uncertainty is higher.
2) Uncertainty has become a synonym for bad mood in our everyday life.
The future is always uncertain, but our perceptions of the future vary. And perceptions define actions. Actions (supply and demand) define prices. Somehow uncertainty is used with a highly negative connotation in our everyday life. It is a game of words. Just like the weather people always say that there is a 30% chance of rain and never that there is 70% chance of sun.
3) Uncertainty is basically another word for market sentiment. High levels of perceived uncertainty (bad mood) and high levels of perceived certainty (good mood) have historically been good contrarian indicators, IF your investing horizon is long enough.
4) There are different types of uncertainty.
There is an economic uncertainty. Uncertainty leads to a decline in economic activity. Less people are hired. Old machines and software licences are used longer. Investments are cut. This is what it has been happening in Europe for 2 years.
When you have the time make a decision to watch the following program on making better decisions. You may find that you made the right decision to do so.
FROM THE INTRODUCTION:According to science: We are bad at making decisions. Our decisions are based on oversimplification, laziness and prejudice. And that’s assuming that we haven’t already been hijacked by our surroundings or led astray by our subconscious!
Featuring exclusive footage of experiments that show how our choices can be confounded by temperature, warped by post-rationalisation and even manipulated by the future, Horizon presents a guide to better decision making, and introduces you to Mathematician Garth Sundem, who is convinced that conclusions can best be reached using simple maths and a pencil!