After a well earned break following a busy year, we are now back to business in 2010. As the year ahead begins to unfold I would like to take this opportunity to reflect on the events of 2009 and how this may help us with our trading plan this year.
The first few months of 2009 saw the downtrend, that had been the feature of 2008, continue into early March. The press was awash with every doomsday theorist and almost every economist on the planet predicted the potential end of the financial system and equity markets. Many so-called experts were making wild and outrageous predictions on how low the major world equity indexes would go – some even predicting the Dow Jones to drop to less than 500 points. With American company’s going broke left, right and centre, (including some large and well recognised brand names), hundreds of thousands of American’s losing their jobs, and home foreclosures happening every few minutes the naysayers and doomsday theorists were having a wonderful time, especially those that had been calling a major bear market for over 15 years!
But, lurking quietly in the shadows of all this doom and gloom were equity markets that were slowly and cautiously starting to rise off their lows. Once again, as has happened throughout history, equity markets lead the economy out of the mire. Despite the negative noise of the financial media, those with a trading plan and money management rules were able to begin re-investing in a rising stock market. As a result these investors and traders were able to take advantage of some wonderful opportunities that combined to see the major world equity markets experience some very significant rises and returns between March and September of 2009.
There are a number of important issues that arise from the events of 2009.
• Whilst many investors without a trading plan or rules to exit their positions or lighten their portfolio’s were severely savaged by the events of the Global Financial Crisis in 2008 / 2009, those with a plan followed the rules and sold, hedged or lightened their equity exposure as the markets collapsed.
• These same investors who held onto losing positions were then either too afraid, or too easily influenced by the negative press to re-enter the market as it turned around. They subsequently missed out on a bull market that saw gains of 50% or more in some markets, and even greater on an individual stock basis in some instances.
• ‘Experts’ are quite often wrong. Whilst predictions and theories sell newspapers and make for spectacular headlines, they don’t make you money.
• The pre and post GFC periods prove to us yet again that you MUST have a trading plan for engaging the markets. Regardless of whether you are a trader or an investor, you must have a clear and unambiguous set of rules that allow you to participate in the markets free of the mumbo jumbo, noise and opinions of others.
• Money Management, position sizing, and risk management tools are crucial to your success (or otherwise) in the markets. Without an understanding of these principals and the discipline to implement them, your investing activities will forever be influenced by the opinions and conjecture of others.
• Success can be achieved in the markets through a disciplined and consistent approach and the application of a rigorous and robust trading system.
2010 will present us with a new set of market conditions to deal with. Will the market keep rising? Or will it retrace? Or will it drift sideways? Will volatility increase or decrease? Will inflation raise its head, or will economies deflate? The list of questions, events and variables that may or may not impact on the markets is endless.
As active and educated investors and traders our ‘job’ is simply to manage what happens and not hypothesize about what may happen. Trade what is, not what you think may or may not happen. Listen to the market and trade what is in front of you in the ‘now’ moment. Eradicate the ‘noise’ that surrounds the market which will make you drift from your trading plan.
To achieve this, we need to have processes to follow the rules of our trading system or methodology in a disciplined manner, free of any emotional attachment to the outcome of any individual trade. Through application of a robust system with a positive equity curve over the long term, our investing activities can be rewarding and positive, despite what the media may try and have you believe.
This will liberate you from conjecture, prejudice, opinion, fear, uncertainty and doubt and keep you focused on your processes.
I wish you all a successful and prosperous 2010.
Hi
I agree with what you have said except for the part that you have to trade in the now. Surely you have to have some belief that some shares will rise in the future, otherwise it may as well be lottery numbers that you are picking, knowing which markets are likely to surge requires some skill and knowledge.
regards
Mark
Response to Comment by Mark:
“Surely you have to have some belief that some shares will rise in the future, otherwise it may as well be lottery numbers that you are picking, knowing which markets are likely to surge requires some skill and knowledge.”
Great question. This question is at the very heart of active investing and even long term investing. I could write a book on this subject. In fact, somebody has. Mark Douglas wrote “Trading in the Zone”. Read it, reread it, study it.
I’ll try to explain in the short space that is available here. There are many related corollaries to this question which might be left for other blogs.
The first point is that nobody knows which shares, sectors or markets are likely to surge. Having an expectation that any postion you take in the market will surge is a trading error. An expectation is a projection into the future of a preconceived outcome. (I purposely haven’t used the word ‘belief’ as it is a far stronger force.) When we make decisions (all decisions are made in the “now” moment) based on expectations (projections into the future) we charge those decisions with the bias related to the preconceived outcome. Do this on a continual basis over many events and your overall results will suffer because the expectated individual outcomes are mostly not achieved with . I won’t get into all the collateral psychological consequences that will ensue as space is short here suffice to say that these will compound the trading error.
Expectations are best left to long term outcomes, and I mean long term like 3, 5 and 10 years, or to skills based improvements (eg I expect to improve my skills by taking the following action…..). Having expectations that are narrowly focused to individual trades or portfolio performance over a week or month will be detrimental to your trading performance as they side track you from your potential to execute flawlessy and from your Trading Plan.
To overcome this dysfunctional thinking pattern (with respect to trading) and to align our minds with the market, Mark Douglas devised Five Fundamental Truths the first of which is “anything can happen”. Executing with the belief that “anything can happen” also overcomes other flawed thinking patterns (again, wrt trading) that human beings have had programmed into them by being a part of human societies. No space here for more detail. Study the book the find out the other Truths.
What you may be alluding to in your question is having confidence at the time you place your trade so that you actually execute the trade. This is exteremly important but is achieved in a totally different way to what you have stated in your question. This has been discussed in detail in previous blogs on 25/3/2009 and 1/4/2009 but you should also read through all the April 2009 blogs in date sequence. You can link to these from here:
Executing good trades all the time
Matter ofconfidence
April 2009 Blogs