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Trading Lessons

Stock Market Investors 2010 Risk Reward Focus, Calm Seas, Blood in the Water

Stock-Markets / Risk Analysis Jan 26, 2010 - 02:43 PM GMT

By: Bob_Clark

Stock-Markets

Best Financial Markets Analysis ArticleThe picture below is a little cheesy but I think it depicts the way many investors feel right now as they sit isolated, feeling trapped and abandoned.  They may have listened to the fear mongers and pulled their pensions or are thinking about it, maybe they fired their advisor and are cuddled up with their cash wondering what to do next.


Their confidence in the markets and their leaders has been totally shaken and justifiably so.  They have come to the realization that the investment advisor they trust with their future and their children's future is nothing but a high priced sales person that could only give placating words and lip service on their way to the basement.  Many self directed investors found their skills no match for the markets either.  Now sitting on the beach waiting for the next storm, knowing it is coming, they wondering what form it will take and whether the island will stand the onslaught.  Confidence in themselves and their ability to make sound investment decisions is also laid bare and found lacking.  All the while they are wondering about the constant sucking sound and where their money is going. The watch words are "trust no one" not even yourself.



As long as one makes no decision and stays in cash, money will invisibly evaporate from each account as buying power shrinks.  The cash sucking cloud, known as government quantitative easing will never go away.  They want you back in the water and either zero percent interest rates or the next storm will push you in.  The time to prepare is now.

As I discussed in my last Market Oracle article "The Gates of Hell are open",most of the things people use to make investment decisions don't work.  The fact is we over complicate everything we do.  If it is fundamental analysis we put our faith in, we search it out and soak it up like a sponge.  The more opinions to reinforce our own the better.  All the while there are equal and opposite ideas on the other side of the street, which we choose to ignore.  A good example is the inflation-deflation debate.  You are told it is vital to choose correctly, your financial life depends on it.

I have listened to both sides and they both sound good to me.  Yikes!
 
If you have an advisor then you have been shown the Modern Portfolio Theory pitch, backed up with lots of pie charts and graphs.  You now know proper asset allocation is the only sensible way to invest.  Meanwhile for twelve years you have been riding up and down the stock market string like a yo-yo.
 
If you choose to use or pursue technical analysis you will find yourself bombarded with indicators and strategies that need a PHD in quantum physics to understand.  I have seen traders with 3 monitors, fifteen charts and twenty six indicators they were trying to make sense of, all at the same time.  As they tried to explain their method to me, I started getting a migraine. The truth is most indicators  are illusionary maybe I should say delusionary, your eye doesn't see the times they didn't work when you study historical charts.  When you actually make trades based on them in real time, you sure see them fast.  If you look in the efinance job postings  you won't see many job postings for technical analysts.  What they are looking for is risk strategists.
 
 
 
Studies have show that most investors are not capable of managing their own money, period, due to emotional pressures.  That is why buy and hold is so seductive.
 
The truth is, in times like these you or the person you put your faith in has to really know how to trade and manage money.
 
I don't have the answer but here are a few thoughts.
 
If you don't want to manage your own money then you can let Bernanke and Co. manage it.  Put your money in a discount broker account (I mean a real deep discount broker, get as far away from bank owned brokers as possible, especially the ones owned by Canadian banks) and buy ETFs, then sit and hope things improve.  This is the old buy and hold method that put you  on the island in the first place, but a least you won't be paying thousands in commissions. 
 
If you have an advisor that rode with you down to the bottom and back up, then you are letting Bernanke and Co. manage your money.  It is basically buy and hold but you also have the added drain of a mutual fund salesperson taking large commissions and management fees out of your vault.  Think salesperson, not advisor.

If you want to use an advisor, find an independent account manager that will manage your money though a discount broker (so trading costs are minimal) for a set fee or on a fee for performance basis.  Make sure that person is knowledgeable and knows how to use aggressive risk management. 
 
If you try to use fundamental analysis to make your investment decisions,  have a sound risk control strategy as backup.  With this complex type of analysis there is no way of knowing all the variables.  Rogue waves and black swans are a way of saying fundamental analysis doesn't really work.  There is a word to describe a trader that only uses fundamental analysis to make investment decisions, it is "bankrupt".
 
If you use or are looking at using technical analysis, choose to keep it simple.  If your method is not profitable quickly and consistently, then you are looking at random results in which you think you see a pattern.  Reading another book, tweaking your indicators and averages or jumping back and forth between time frames will not improve your results.  The dog's breakfast in the chart above, shows clearly that even in directional markets most indicators are basically random.  Again your method must have a powerful risk control strategy.  If you win or lose randomly using the same indicator and don't know why, it won't be long before your subconscious figures it out and starts sabotaging you.


 
By now you probably have noticed a theme in this piece.  The investment business is full of misconceptions, misinterpretations, bad ideas and bad advice.  There are also lots of sharks out there as well.  Who's money did Goldman take, to give them their trading profits last quarter?  When you trade or invest in today's markets you need to know you don't start in the minors, there is no B-league, Goldman's 5 billion gain last quarter makes that crystal clear. 
 
Make no mistake, investing is gambling.  No significant asset appreciation in 12 years means your odds with buy and hold are 50/50 at best.  Understand you are taking huge risks with your future but also know you have no choice because staying in cash is equally risky.
 
The key to success is making risk your friend.  No matter which path you choose, whether you throw in with Bernanke and Co. or you take matters into your own hands, don't let your ego take ownership of losing trades, they are just part of the business.  Make learning to manage risk your first priority.  Start with learning to use a basic stop loss on every position.  If you go to my blog and look at some of the older posts you will get the idea.

Keep your friends close and your stop loss closer.

Bob Clark is a professional trader with over twenty years experience, he also provides real time online trading instruction, publishes a daily email trading advisory and maintains a web blog at www.winningtradingtactics.blogspot.com  his email is linesbot@gmail.com.

© 2010 Copyright Bob Clark - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

liz
27 Jan 10, 08:17
owned by Canadian banks

I am Canadian, I trade ETF's very successfully through a Canadian bank discount broker - please explain this so I know if I have to make alternative arrangements...thanks


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