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Posts Tagged ‘strategy’

Why investing is like playing tennis

Posted by Dan on February 27, 2019

One of the first things a coach tells you when you pick up tennis lessons is to keep your eye on the ball at all times, and not to get distracted by outside noises. If you become good enough and make it to play tournaments your coach will start telling you not to watch the score too much. Play the point and still keep your eye on the ball while blending out distractions. And there will be plenty of distractions. The opponent may be receiving illegal coaching from the sidelines. A ball may be called out incorrectly. Spectators may be shouting things while you hit the ball. Or a phone may ring. Even the wind may cause you to miss an easy point… There will never be a shortage of factors that can cause you to lose focus: you stop watching the ball as much as you should and you start finding all kind of outside excuses for your bad results.

Investing is very similar. Instead of keeping your eye on the ball at all times you must keep your eye on “price” at all times and blend out all other noises. Is the stock you are trading going up or down? Of course you will watch price within the chosen timeframe you are trading. A daytrader will watch what price is doing intraday. A swing trader will keep an eye on day to day price movements. A longer term investor may only consider the weekly or even monthly moves.

And there will be plenty of outside noises that can keep you from doing that. You may think the Fed or Trump is doing illegal coaching from the sidelines. In the media you will be hearing all kind of spectators shouting their opinions on what and how you should trade. News items may be like the sudden phone call or burst of wind that causes you to panic out of your position, making you miss out on some good profits. E.g. president Xi has farted so stocks should go down. Or a commentator on CNBC is warning for a crash. Or the national debt is up again… I have been seeing that kind of news for over 30 trading years and it has never helped me to trade better. Whenever I let that kind of factors influence my trading decisions it has cost me money. If you can blend all those factors out and keep your eye on the ball/price you will give yourself the chance to play near the best you can. That’s why some people with average talent and average systems can do quite well, because they have become good at blending out distractions.

At some point a tennis player will also learn to anticipate the opponent’s shots, but only that much. If you anticipate too much or too early you will become too vulnerable to being wrong-footed.
In the same way an investor can try to anticipate what the market (=other traders) may do next. But if he anticipates too much that can become a distraction in its own right. Anticipation starts with observation. If the opponent tennis player is far outside the left of the court then you may be able to hit in the open court on the right for an easy point. But he may expect you to hit in the right side of the court, so he could be running in that direction already when you hit the shot. That could actually make hitting into the left side where he is coming from the easier way to get the point. This is the game of anticipation and how it can backfire.
In the market you may observe that a lot of traders are bullish (right) or bearish (left), but that doesn’t mean you will get to easy gains by hitting to the other side. So you can anticipate a little, but keep the eye on the price because it’s important to confirm if you anticipated rightly. You will need to react quickly if price tells you that your anticipation was wrong.

A good tennis player also needs a game plan if he is to beat equal (or even stronger) opponents. In trading that means you use some kind of method. A game plan/method should be chosen with your own personal strengths in mind. Of course, your game plan can evolve over time, as you get better and more experienced.

Bottom line: blend out market noise. Watch the price. Anticipate a little, but be ready to reverse course as soon as price tells you your anticipation was wrong. And stick to your method.

Good luck.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Observation, Observation, Observation

Posted by Dan on February 26, 2016

We probably all heard the old adage: Location, Location, Location. It’s considered the number one rule in real estate investing. For stock investors there is a similar rule: Observation, Observation, Observation. Sounds simple, but what does it mean?

As an investor or trader I may be using fundamental analysis, I may be using technical indicators, or cycles.. I may be watching the daily news or scanning social media for good stock tips. But all these tools will not be of great help unless I can bring it all together with proper observation. And observation is more than just watching or reading.

First of all, proper observation requires a certain distance. Imagine you are in the middle of a crowded square. From that position it will be very difficult to have a good overview of what is going on. Then you go to the 10th floor of a nearby building. Suddenly you have a very good overview of the entire square and all the movement. And then you go the 80th floor of the building. You can still see the square, but now you are too far away to spot any details. So, there is an optimum distance if we want to observe a square and all its activities.
A similar detached observation is needed when I try to watch the stock markets. Watching from the right distance I can see what is going on out there without being swept away by the frequent waves of emotion that keep rolling through the participating crowd.

Secondly, I should not only observe the markets in a detached way, I also need to observe myself. Am I tired? Am I happy? Do I feel depressed? Am I greedy? Or angry? Do I want to take revenge for a previous loss? Did somebody’s comment on a social network upset me?… All these different moods can and will affect my ability to observe the market in a neutral detached way. If I am not aware of my mood I will start making bad trading decisions.
Having a lot of money at stake will also influence my observation skill. Being long or short in the market may cloud my vision and I will start tending to see the glass as half full or half empty, depending on my positions in the market.

So, we already found two types of observation: observation of the market, which we could call “the outer game”; and observation of myself, which is “the inner game”. Honing my skills in both departments can help me to become a better investor, but what is the third observation?
Well, the third is “observation of my observing itself”. That may sound mystical, theoretical or excessive, but it really isn’t. Observing the markets and observing myself is all nice and good, but if I don’t observe my methods and ways of observing then I will never really sharpen my observation knives. This third observation is neither outer nor inner, it encompasses both.

Now we have three forms of observation. And all three require the necessary distance. Distance from the market, distance from myself, and distance from my own observing.

Each form of observation will generally improve with practice, but they have to be improved more or less simultaneously if we want to improve beyond a certain level. E.g. We can use the internet to read and absorb the observations that other traders are making. But just like we don’t grow muscles by watching somebody else lift weights, reading about other people’s observations and trades is not going to help much when it comes to improving our own skills.

A little metaphor may help to dig this. Reportedly there was once a man who read every book he could find about swimming. Then he went into the water and drowned. That may sound funny, but it keeps happening every day in the stock market waters. The reason is that reading books and courses and websites about investing typically fills the reader’s head with a bunch of concepts that mainly belong to the “outer game”, and if they are very lucky there is one chapter about observation of self. But having some logical concepts in our head is still miles away from practical observing in real time in the real world. So, what to do?

The best advice that can be given to a new trader is: start by putting one foot in the water. Because most new investors cannot wait and jump in right away, excited by the prospect of easy profits without working. Some make it back to the shore before drowning in the stock market waters, and others don’t.
The second best advice that can be given to a new trader is: don’t listen too much to the other swimmers and go at your own pace. It feels so scary alone in the water and herd instincts tend to take over when people are in fear, so most are soon following somebody who reportedly won a medal at the olympics years ago. A little later they find themselves in deep open water, the nearest shore out of reach, and the master swimmer they trusted and followed waving back at them from the beach bar with an expensive drink in hand. If they are lucky the coastal guard rescues them before the sharks appear. Yes friends, the stocks markets are shark infested waters, and everything you read is fishy.

Of course, this metaphor was just a long way of saying that there is no good substitute for doing your own thinking and for doing your own trading based on your own observation. And that observation doesn’t have to be limited to the stock markets. At some point you may discover that even observing and talking with drunk people in a pub is useful practice for an investor. Why? Because there are always a lot of intoxicated people in the market. People who are intoxicated with emotion from recent losses or recent profits… People who are intoxicated with the latest central bank guidance, or with the most recent quarterly filings of Carl Icahn. People who are intoxicated with lunar cycles, or with my reversal levels… All these things can make an investor drunk with expectation and hope, unless they are being watched from the necessary distance. If you can detect which side of the market is more intoxicated then you have found an edge. The intoxicated side is usually louder and has no doubts that they will be proven right, so they can be easy to spot.

This gives just a few examples of what may happen along the path of observation. Eventually you may watch a leaf fall from a tree and deep down it will resonate with your understanding about the markets. Then you have become a true market observer.

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Who buys new record highs?

Posted by Dan on March 30, 2015

Last week we asked a poll question and several readers have taken the time to put in a vote. More on the results later in this post. We also have the LT wave chart for April, but first we take our customary look at the S&P 500 (click image to enlarge it):

S&P 500

We got a pull back as was indicated last week. US indexes are sitting near major support levels again, and with another week of lunar red period to go they are at an increasing risk of falling further. The weekly reversal levels outlook is also very mixed, giving a situation that is going to resolve in one direction or the other. Which way? My technical indicators are all pointing down and at rather neutral levels, so nowhere near indicating a bottom at hand. It looks like more downside action is needed to clean out the market. But will we get it?

The LT wave has been doing well in recent months, and here is what it shows for next April (click image to enlarge it):

LT wave April 2015

In March we had the expected weakness in the first week with a low near the 14th. The 3rd week was especially strong with the highs of the month coming right on target.
For April a different pattern is projected. There is room for a weak rebound attempt until April 6th, followed by a very weak period until April 17th. If the market is to drop below recent support levels, then this is the time to do it. Then renewed strength until the 25th, before weakening again in the final days of the month.
Interestingly, the very weak period in the middle of April will be a lunar green period. The lunar cycle has been very reliable so far this year, but if the LT wave is correct then this will probably be a cycle inversion, with the market dropping during that green period. If so, a major low in May can be expected.

Last week we asked: “How often do you buy a stock that is at record highs?” This is the current result of the poll:


We see that almost 1 investor out of 3 never buys any stock that is at record highs, and only 16% answer “frequently”. Half of the answering readers buy new record highs rarely or never, and 1 out of 3 does it “sometimes”. What this suggests is that most investors are trying to pick bottoms or time corrections most of the time. Only 1 out of 6 investors seems to use buying new highs as a deliberate strategy.
This also means that when stocks hit new record highs it is a small minority of buyers that keep pushing them even higher. Most investors are trying to wait for a correction to get in a bit cheaper, and if corrections are very shallow they typically miss out the entire move.
John Templeton advocated using “unpopular” methods and changing methods when your method becomes popular. Buying new record highs has been an unpopular strategy for years, and that may be why it has worked so well since 2012. Will it become popular again?

Good luck,

Posted in Financial Astrology, Market Commentary | Tagged: , , , , | Leave a Comment »

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