Whilst the world equity markets continue to display high levels of volatility and irrational behaviour in line with the turmoil being experienced in financial markets, now is a great time to reflect on how these conditions have impacted your own trading and exposure to the markets and how to learn from any mistakes so that they are not repeated in the future.
It is an often quoted line (and one that I am constantly reminding people) that you cannot engage in any trading or investing activity without a predefined plan that will include an investing strategy (or strategies) that is proven to be profitable over the long term. Your strategy can also be referred to as your trading ‘edge’. More will be written about what an ‘edge’ in future postings.
Those of you with a detailed trading plan will, hopefully, have stuck to the rules detailed in that plan and taken the steps detailed in that plan to exit trades as and when the rules told you to do so thereby reducing exposure to a falling market. Your strategy may also include portfolio hedging rules under certain market conditions.
For those of you following the SPA methodology, this simply involves taking the exit signals, as and when they occur and reducing exposure to the bear market. The exit signals are executed without any subjectivity or rationalising of the decision – the positions are simply exited according to the rules within the SPA system.
Those traders who have not acted on exit signals, or became subjective in the decision making process, may now find both the share portfolio’s and the cash amount available to take future signals significantly more reduced than what they should have been! Portfolios can recover from 10% loss trades or even 30% loss trades but large loss trades in the regions of 70% to 95% wipe out portfolios, especially if traded on leverage. There have been plenty of large negative moves such as these in this market even in stocks that were considered fundamentally sound when this bear market started. Proven exit signals using technical analysis is the ONLY way to eliminate large loss trades.
There are many, many lessons that we can all learn from this latest phase in the ongoing saga of the equity markets. From a period of extreme euphoria only 12 months ago, the markets are now in a period of extreme pessimism and capitulation. This too will change, as it always does. With a detailed plan and methodology for engaging the markets we will be able to confidently go about our business and re-engage the market as the world moves on and trading and investing opportunities continue to present and re-present themselves.
I look forward to your comments and input into my blog and hope that it can become a forum for us all to share our ideas, knowledge and experiences.