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Black Monday 1987 Stock Market Crash Real Secrets for Successful Trading

Stock-Markets / Financial Crash Oct 19, 2015 - 05:05 AM GMT

By: Nadeem_Walayat


It's been many years since a Monday has fallen on 19th October, the most notorious occurrence of which was in 1987, Black Monday, which is why October tends to be the month that stock market bulls fear, whilst encouraging the crash is always coming crowd to become their most vocal. In fact regardless of what the stock market has actually done to date, the perma bears can literally be seen jumping up and down like demented rabbits, proclaiming that the stock market end is once more nigh, pointing to 7 harbingers of the apocalypse that will bring about stock market armageddon. So, yes October tends to be an unusually irrational month for where stock market expectations are concerned, this despite the fact that EVERY stock market crash in the general indices such as the Dow, S&P and FTSE have yielded buying opportunities. In fact the Dow recovered about 60% of the 1987 Black Monday Crash in the subsequent 2 trading days!

1987 Stock Market Crash Lesson for Investors

The Great Crash of 1987 destroyed investor confidence that had been built up to fever pitch during the preceding 5 year long bull market. Investors were at that point ripe to be suckered into expectations for a replay of the 1930's Great Depression and stock market collapse scenario that is always bubbling away, waiting to strike FEAR AFTER each crash, to claim that financial armageddon has finally arrived.

Unfortunately for terrified investors who mistakenly fell for the doom and gloom mantra would not only have missed one of the greatest bull markets in history but possibly seen their wealth disappear during the subsequent 12 year bull run as they foolishly continued to bet against the bull market, perhaps to only finally realise too late that the perma bear mantra was wrong, eventually succumbing to the euphoria at the final stages of the dot com bubble, but then to once more be wiped out on the subsequent crash that the doom merchants would claim to have forewarned off when the truth is that the doom mantra would have bankrupted all who listened many times over during the preceding decade.

What is the Lesson of not just 1987 Crash but ALL Crashes and Bear markets?

The facts are if you had BOUGHT on the day following the crash of 1987 you would have made a return of 890% by now (17215 / 1740) or 35% per year BEFORE dividends, which is set against an average Inflation rate of about 3%, and same holds true for if you had invested at any point following the 1929 crash!

  • Dow 1929 Peak 381
  • Down 1932 Bottom 41

Today's Dow 17,215.

What is 17,215 divided by 381 ?
What is 17,215 divided by 41 ?

What are the trend trajectories off either the 1929 bull market high or the 1932, 1987 lows ?

Where do the trend trajectories imply the Dow will be in 5,10, 20, 40, 80 years time ? Significantly higher or lower ?

If there is a constant battle between Deflation and Inflation then why is this not reflected in the general stock market indices such as the Dow?

It is because as I have explained at length for many years in well over 300 articles and several ebook's that the general stock market indices are locked into an inflationary exponential growth spiral, as corporate revenues and earnings (profits) are leveraged to rising consumer prices (fuelled by perpetual money printing currency debasement) AKA the INFLATION MEGA-TREND (ebook free download), trends of which are further enhanced by expanding profit margins as a consequence of increasing worker productivity as technological advances are taking place exponentially, for instance today's smartphone has more processing power than the whole United States had 50 years ago! And the technological advances over the next 50 years will be exponentially greater! i.e. In about 30 years a computing device on your person will have more processing power than that of the entire United States has today! Think about that for a moment.

You may argue that companies go bust thus this cannot be be so ? Yes, companies do go bust, but they get thrown out of the general stock market indices long before they disappear into history and replaced by EARNINGS GROWING companies, a fact that apparently fails to register in the consciousness of deflationistas' who place theory and models of what SHOULD happen over the REAL world experience of what actually takes place in investor portfolios.

The bottom line is that there is no battle between deflation and inflation because deflation only exists in the minds of ivory tower academics or other vested interests that are paid to pump out economic propaganda to keep the slave populations sedated as to the consequences of the ever present Inflation Mega-trend, where anything less than 2% annual compounding of official inflation (that is significantly lower than the real rate of inflation that people experience) is deemed to be bad therefore supportive of the fiat currency money printing system that all governments are engaged in utilising to enable then to spend monies they do not have by conjuring money out of thin air to buy votes.

And the same holds true for most western developed general stock market indices. Now before you play pick and mix with indices, know that my analysis is focused primarily on the Dow and FTSE where the trend for these can be extrapolated to other general stock indices such as the S&P 500 and not sectors which new technologies can make obsolete.

Knowing these facts gives one a head start on most investors that let themselves get caught up by the media hype and sales pitches of perma doom merchants. Contrary to the vague utterances of the media whores, whose commentary with the benefit of hindsight can be interpreted towards any outcome, the reality is that significant investments can only be entered into on under the basis of firm conviction's of rewards far out weighing the potential risks, i.e. to invest when stocks are cheap where the risk is that stocks could get cheaper before showing profit - March 2009 - Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470). Subsequent price action spanning many months and even years does effect risk vs reward which is what investors should be focused upon, and not the media whores or perma-fools of whatever persuasion.

Trading the Great Crash of 1987

In 1987 the stock futures markets were in the infancy, where markets such as that for the Dow Jones index not formerly in existence. The only way a small time trader such as myself could gain exposure to such markets was via the likes of IG Index, a spread book maker, which offered the facility of trading the futures markets at an affordable level of risk.

The key elements were -

a. Small position sizes of as little as £2 per point,

b. all of the commission was included in the spread between the buying and selling price and c. IG offered guaranteed stop losses, so that the risk was absolutely controlled, at a little extra cost included in the spread. Stop losses are a critical element of successful trading, as you have to know when you are wrong and the best way is for the market to tell you that you are wrong by stopping you out of your position.

Pre- 1987 Crash - The Great Storm Hits Southern England !

Thursday 15th October - Michael Fish is a Weather Man

I recall watching Michael Fish the BBC weatherman late Thursday night, he said. "Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way; well, if you're watching, don't worry, there isn't." Well that statement has haunted the Mr Fish ever since and is a good lasting memory imprint from 1987.

My expectations had been for an UP day and therefore my initial position was geared towards a Dow rally. This trade was stopped out with a loss of £165. Later in the session I took a chart trigger to go LONG again which I closed out with a profit of £100, so I ended the day with a small net loss of £65. However I could clearly see that the earlier downtrend had weakened the Dow and risked a break below the Sept 07 low.

With storm winds buffeting the house, some 180 miles north of central london, my expectations coalesced around Friday being a strong down day for the FTSE given the brewing weather and financial storms as stocks targeted a break of the previous low.

Friday 16th October - The Hurricane Hit Southern England

The News reporting was full of the devastation in the South of England with power cuts in many areas. Also much of the City of London had failed to report for work and hence the UK financial markets were not fully operational.

I called IG index half expecting no one to answer the phone and so was pleasantly surprised that they were open for business! Whilst I waited for the Dow Jones to make up its mind on whether it wants to break the Sept low or not I shorted the FTSE twice during the day with the expectations that the unexpected storm would be an additional negative driver for UK stocks at least, exiting both trades before the markets closed with profits of £305 and £30.

Later in the evening I was alarmed by the sell off in the Dow which closed Friday sharply lower, not only decidedly breaking the September low, but the downtrend was accelerating.

I spent the whole of Friday and Saturday pondering the change in market behaviour which by Sunday, as though a switch had been turned on, I realised with certainty that the stock market was about to Crash! Being isolated from other market participants and commentators, I was not aware of the reasons why it should or should not crash, or what others thought should happen, rather that the Market that I had been in synch with for some time was behaving out of character.

So I was kicking myself for closing the two short FTSE positions out by Fridays close! For I concluded that if it was now so obvious to me, a relative newbie to trading that the stock market was going to crash on Monday then it must be obvious to everyone else in the world! I.e. all of the the experienced city stock and futures traders. Therefore I expected the futures would heavily discount the crash and so how can I make any money by shorting the market on Monday's open?

Anyway after resigning myself to more or less having missed most of the boat, I had decided that I would at least try a SHORT to ride the already deeply discounted market on Mondays open, hoping that the futures will not be discounting too much of a drop, may be a couple of hundred points from the spot indices would still enable me to profit from an anticipated stock market crash.

Monday October 19th, 1987 - Stock Market Crash - Pay Day !

Tell me Why I Like Black Mondays

Early Monday morning I saw the FTSE open sharply lower, down about 100 points, So I sighed and called IG Index and asked for the futures prices, expecting bad news that the futures would be discounting drops of several hundred more points for both the FTSE and DOW, but they were NOT ! They were discounting barely a 50 point drop from the spot indices which meant that the market was NOT discounting a stock market crash! I immediately sold the Dow SHORT at 2247 and the FTSE SHORT at 2147.

Mid-day (UK time) - I called the IG to move the stop losses to lock in profits, which with IG Index at the time meant freeing money up for use in further positions. The FTSE spot index was down over 200 points by now, but the futures price was showing very little difference to the spot price so I shorted the FTSE some more at a price of 2047.

2.40pm - Wall Street opens - Well tries to open but the stocks are not opening due to the volume of selling freezing the market, therefore for a while the Dow Jones index was giving a false price of only having fallen a few points, the lull before the storm? I give IG a ring to find what prices they are offering with a view to shorting some more:

"Hi could you give me a price for November Dow Please ?"

"Yes Sir, It is trading at 2045"

"Good, I would like to sell to open £5 at 2045, with a 50 point stop"

" You want to sell ?"

"Yes Sell",

Why was the broker surprised that I wanted to go short? Maybe looking at my account he thought I was already too heavily short? Maybe IG feared what was about to transpired and wanted to reduce the size of their book? Or perhaps people generally were to terrified to short the Dow? I don't know, but the impression I got was of surprise on the other end of a line.

So that was my fourth short opened for the day at 2045, meanwhile the actual Dow Jones spot indication was down only 50 points at about 2,200 due to slow opening of individual stocks against the actual futures nearly 150 points lower!

7.40pm - The Dow is now down about 300 points,having rallied from about 340 down about 10 minutes earlier. Having watched the market for the last 5 hours, I can tell that the Dow is gearing up for another bout of selling towards being down at least 400 points, so wanting to sell more I give IG Index a call.

"Hi, can you give me a price for November Dow please".

"Mr Walayat, we are only accepting orders to CLOSE "

Damn !!! On a £10 per point I could have made another grand on expectations for -400 down by the close.

8pm - The Dow is hovering around 300 points down with an hour to go, this is nail biting stuff! - I can't stand this as the broker won't let me open new shorts and I do not want to liquidate, so I go out out for a drive and return when the US markets have closed at 9pm.

9pm - BBC 9'0 Clock News - Dow Jones closes down 508 points at 1739 !!! cough, cough splutter, 508 , FIVE HUNDRED AND EIGHT POINTS !!

Wow ! I am rich ! rich, RICH - How much? £14,000 at least! From an account balance of £700 to £14000 in one day ! Okay in today's money £14,000 is not a lot to shout about, but to a 19 year old in 1987, £14,000 was an enormous amount of money especially as it was made in a single day ! As an example I could have bought a terraced house in a nearby street for about £14,000!

Now what to do next? No time or inclination for sleep, I need to work out the strategy for what to do tomorrow as clearly the FTSE is going to open sharply lower! This looks like a complete and utter collapse of the financial system - 508 points down ! Not in my wildest imagination could I see the Dow Jones closing down 508 points, this crash is bigger than that of 1929! Which was about 10%, not 22% in one day!

I decide to close the positions tomorrow during the morning, I have made the paper profits and now I need to lock them in.

1987 Stock Market Crash Intra-day Trading Chart

Tuesday 20th October 1987 - Big Bounce Day

As expected he FTSE opens sharply lower and trades down by over 200 points by mid-day. Having watched the market trend lower, and having withheld on my decision to liquidate any of the positions thus far. I am absolutely exhausted by now due to not having slept for over 24 hours and actually starting to feel a little dizzy so I give the broker a call to get some prices with the aim of liquidating all of the positions whilst I am still mentally able to do so without starting to hallucinate figment price action!

IG is giving me a quote of 1720 for the FTSE and 1570 for the Dow. These are excellent prices at deep discounts to the spot prices, so I decide to close the larger Dow position at 1570. And move the stops on the other three positions. I set the FTSE position stops at 1790 and 1800, and the remaining Dow short position stop at 1730, i.e. just below last nights close, and 160 points above the current futures price.

Wall Street Opens Sharply Higher and I am stopped out of all positions. Exhausted, I was off to bed.

The Outcome

In financial terms, I made a profit of about £12,300 virtually overnight. In EGO terms the increase was much larger! I was off floating into fantasy land of becoming a millionaire by the time I hit 20!

Following the stock market crash speculation was rife that some of several financial institutions could go bust, worried that my new found wealth my evaporate I withdrew more than 50% of the funds on account on the 23rd of October 1987.

An Historic Marker is SET

Of all that has come to pass during the subsequent 25 years of my trading life, one major advantage I have had that many traders have not is a clear marker against which to compare methodologies and trading psychology. It may not have always been clear with so many holy grails of trading and analysis floating around out there, but I have always had the option of referring back to what I KNOW with CERTAINTY that actually works.


Okay so you have read my account of trading the 1987 Crash and are now probably wondering, how about some proof? Well in that regard see the scan of the October 1987 account statement from IG Index -

Why 90% of Traders Lose

The failure rate for financial market and commodity traders has remained at a consistently high 90% for many decades, this despite all of the advances in information technology and the flood of new learning materials that is churned out annually, therefore why is it that 90% of traders still lose ?

In my opinion, a high 90% of traders are destined to lose because they are in fact learning from / listening to the 90% of losing traders that preceded them, who following wipe out in the markets have gone on to focus on writing about market price action and methodology with an even greater concentration observed to occur in the mainstream press as account busted traders / investors turn failure to trade into full time media careers and thus perpetuate a continuous cycle of failing traders guiding new traders towards a similar fate.

This explains why the mainstream financial press can literally miss WHOLE Bull and Bear markets despite trends that end up spanning many, many years. They can be recognised by their rhetoric such as the perpetual the end of the trend is coming mantra that is based on fundamentally flawed understanding of what actually moves markets, which is why they failed to succeed in trading in the first place.

Given that 90% of trader fail, it can be assumed that that at least 90% of those that provide financial commentary are failed traders that spend their time writing about the act of trading rather than ever engaging in actual trading which culminates in the big name media whores that we see prancing around between make up rooms and TV Studio's, usually regurgitating what other failed traders have already commentated upon or make such weak statements that can be easily applied to virtually any outcome i.e. that the market will definitely fall, but then again it may definitely rise. The media whores are well practiced in applying such phraseology that ensures that they can always claim victory for publicity purposes whatever the actual outcome is, as the viewers are left to perceive whatever they want to in the media whore sales men's commentary, based on their own pre-existing market bias. The mainstream financial media is more than eager to push the selectively edited past commentary that results in nothing more than blatant misleading advertisements masquerading as financial market commentary. Stop for a moment and dissect what the latest utterance of a media whore actually is and you will soon realise the game of deception that is being played in an attempt to hook you in towards ultimately purchasing a product or service.

In actual fact perhaps as little as 1% of the material floating out there is produced by successful traders because successful traders are primarily going to be focused on trading rather than writing about trading or marketing trading services, with probably only enough spare time to write a couple of books over their whole lifetime which compares against the book factories that can churn out as many as several titles per year that virtually ensures that at least 95% of your trading book shelf is packed full of garbage, totally useless, and you know it!

Still it could be worse, academic economists inhabit a zone that is based purely on mumbo jumbo that is guaranteed to result in unforeseen outcomes, for academic economists tend to be the second greatest media whores just a step down from politicians, who exist purely to give off the air of authority and certainty as though economics is a science when in reality it is pseudo science more akin to the art of psychologically managing the general populations expectations aka economic propaganda than in determining any sense of economic reality. Economic theories are just that theories that have been modeled on selective editing of past economic data for political purposes which every trader should know (failing or successful) is just over optimised back fitting onto selective past trends that proves totally worthless going forward.

The Real Secrets of Successful Trading

For at least the past 7 years I have wanted to write a book on the real secrets of successful trading but have never found the time to get around to doing so. However I have alluded to where the secret lies many times, in articles and more specifically in comments. The most notable of which is suggesting those wanting to learn the real secret of successful trading should watch the early 1980's film Excalibur, for the seed for their own light bulb moment.

The Excalibur movie is the 1980's replay of the King Arthur myth focused on the hunt for the holy grail, (I think I first watched this movie in 1983). That should perk your interest because most traders very early on in their trading careers are convinced and easily seduced by the search for the holy grail of trading, even more so today where the internet is full of a multitude of competing holy grails out to hook traders into handing over huge sums of money for the privileged of learning 'secrets'.

However, I have had several advantages over today's traders in my early years such as there was no internet, no smart phones, and the local library shelves were bare of trading books so there was nothing to pollute my understanding of markets and trading unlike the case today where traders of all abilities can easily find themselves drowning in an ocean of various holy churches of Technical Analysis of tools, methodologies and theories. Neither was I immersed in a reinforcing trading culture as many today find themselves at the heart of the worlds major financial market trading cities such as London, New York and Chicago. Instead, I found myself trading in the back waters far distant from the centres of the financial world, a blank canvas with no access to the consensus view of how one should trade or interpret markets.

The movie Excalibur planted the seed that germinated into an important element involved in the development of my trading style that ultimately was able to even beat the Great Crash of 1987 that claimed many traders in its midst's. Not because I was somehow special but because I literally traded in a bubble that was filled with the likes of Excalibur and Chaos Theory, and NOT TA, and as long as I remained in that isolated bubble I was immune to the effects of the holy Churches of TA whose missionaries are always eager to seek conversion of others for a fee on promises of untold riches, that in my opinion amounts to nothing more than a sales industry geared towards selling what does not actually work as I illustrated earlier.

Excalibur Light Bulb Moment - The Real Secret of Successful Trading

What is the message from the arthurian myth, what is the message of Excalibur?

Grail Figure: What is the secret of the Grail? Who does it serve?
Perceval: You, my lord.
Grail Figure: Who am I?
Perceval: You are my lord and king. You are Arthur.
Grail Figure: Have you found the secret that I have lost?
Perceval: Yes. You and the land are one.

Do you understand ? Maybe you need to watch the movie to understand that YOU are the Grail!

I am tempted to diverge here and extend the scope of this light bulb moment far beyond the realms of trading, but you are probably not ready for that so will stick to trading. Now you understand what 90% of traders fail to understand during a lifetime of trading, as they religiously remain on a constant quest for the holy grail of trading where it seems to be a search for ever more complexity as being the answer, when instead the exact opposite is true, as Perceval discovered during his quest, the answer exists within you and not anywhere else!

If you want to succeed in trading then pick the simplest tools such as basic trend analysis, use hand drawn charts and practice its application in a real-time trading environment and not only will you start to make money but it will literally become easier over time as you become expert in its application, as you reinforce your brain with the successful patterns of behaviour in interpreting the market price action. All with the added bonus that you need not worry yourself about latest great theory or technical tool that is about to be published.

Pick one market and monitor / trade that market only.

Use hand drawn charts to get close to the price, draw open high,low,close graphs for the daily, weekly and monthly charts and you will learn more about the markets you are trading then from any book or trading course.

The Real Secrets of Successful Trading

1. That you don't need to know ANY Technical Analysis to Trade

2. That you don't need to read ANY Trading Book to Learn to Trade. Do not invest yourself in Trading theory, for KNOWLEDGE is not the goal of trading! It does not matter if you ever heard of Gann or Elliott that will only seek to confuse and corrupt how you think and act. The only thing that matters is that you are able to grow your trading account!

3. To focus on trading Only ONE market and CONCENTRATE on the market you trade, to catch stock market crashes you need to be in synch with the market which can only be achieved through concentration, and given where I stand today some 28 years on from the 1987 crash, I can tell you that trading markets is a young persons sport, one who has few distractions, one who has the energy to focus on ONE market for months at a time!

4. To learn to imprint the price action into your mind through concentrated practice, anything that gets in the way of this process will NOT help you trade i.e. the hundreds of technical indicators because you are supposed to be trading the PRICE, and NOT the indicator! So when the indicator says one thing and the Price says something different then you will be CONFUSED, so forget ALL trading indicators and focus on just the Price.

5. The Holy Grail of Trading is YOU. Not any theory or tool or trading service - But How YOU REACT to Price Movements in REAL TIME.

6. Money Management is a Critical Real Secret to Successful Trading - Using Stops, Limits and Moving them in your FAVOUR as prices move in real-time. Your sole objective is to bank profits and let losses be stopped out short. If you have any doubts about a trade then you EXIT. It is not rocket science it is trading with determination of Gain vs Loss, Plus vs Minus, nothing more!

The bottom line is to be truly consistently successful in trading, including catching the infrequent stock market crashes and major junctures, then you need to approach the markets as an single minded obsessive athlete approaches competitions, who is focused on one goal alone which is to do what ever it takes to win that gold medal. And that's what it takes to become a successful trader, not any book or trading course or service, which are akin to buying a gym membership and then only going once a month or so, and thinking that is sufficient to turn you into an athlete.

Market Forecasts

At about this point you are probably asking what about the forecasts?

Forecasting plays little role in trading, a shocker perhaps? But the reality is that one needs to concentrate on the current price and react to it, therefore one needs to stop second guessing the market by telling it what it should be doing which is what a forecast effectively is.

However, it is not as black and white to say that one does not forecast when when reacts to price movements in real time. For every trade entered into is on the basis of a positive outcome i.e. you are forecasting that your trade will generate a potential profit (limit) against a potential risk (stop). So in reality ALL trades are entered into on the basis of a forecast, its just that the forecast is not on the basis of analysis as positions have room to breath as stops and limits are adjusted or positions liquidated on the basis of doubt in response to subsequent price action.

Chaos and Forecasting

What you have just read goes against the grain of a whole industry built around the forecasting of the financial markets, both in terms of trading and investing as well as publishing. Anyone who has put some serious time into studying chaos theory will soon realise that forecasting is not possible to the extent where there will be enough consistency for long-term profits.

I first came across the chaos theory in the early 1980's and was eager to replicate the remarkably simple code required to generate such complex and beautiful patterns such as the Julia and Mandelbrot sets. This obsession and fascination has stayed with me since, and existed long before I became aware of the financial markets. It is probably the primary reason why I trade the way I do more than anything else, as in the early years all I understood was how to react to markets as per what chaos theory had imprinted within me, I could not imagine forecasting the markets until becoming fully aware of technical analysis. Specifically elliott wave theory and Gann Analysis both of which exhibited characteristics that were found within chaos theory i.e. fractals, but are as far as I am concerned red herrings, as the Excalibur light bulb moment illustrates and chaos theory reinforces of what elliott wave theory and gann and all other technical analysis are in terms of the holy grail of market analysis and forecasting.

Today Chaos theory goes by many names, such as the 'Black Swan Events', which was coined by Nasem Taleb in his book, which I have yet to get around to reading!, but from what I have garnered it is a copy of aspects of chaos theory. Which fulfills this ages role in a more perhaps subdued manner that does not take the leap fully towards becoming a reactive mind and hence is more palatable to the technical analysis communities.

The greatest example of chaos theory at work is the butterfly effect, which I am sure you have all heard of so I won't repeat. But what it implies is that order only appears to exist even in the mega-trends such as the planetary cycles that have existed for billions of years, however in reality even that cycle could be knocked out by a minor event that took place far earlier than when the system actually breaks part. Where the markets are concerned there is no effective predictable strategy, and those theories such as elliott wave theory if used as a predictive tool are highly dangerous. Yes any tool even what is perceived as a predictive tool can be used as a reactive tool. The solution here if not overly complex is to literally have multiple counts that basically suggest any number of possible outcomes. where the tendency is to lean towards the solution that most closely resembles price movements in real time, i.e. basically reacting to price movements in a highly complex and unnecessary manner.

More in this video on Trading Chaos Theory:

We have witnessed chaos theory in work in the ongoing banking crisis which has effectively tipped the worlds system into a new era which means that the rules of what worked during the credit boom no longer apply. Our butterfly effect was clearly when the markets were liberated from regulation in the UK this probably dates back to the 1986 big bang, so the instability in the systems have been allowed to grow unnoticed until they reached a tipping point when literally the banking system fell over the edge of a cliff.

The goal of forecasts is to -

a. Identify and run with the trends for as long as they persist.

b. To identify the tipping points that literally change everything regardless of the fundamentals for the butterfly effect insures that the actual instability had entered the system long before the system fails to react to 'fundamentals'. It is this that enables me to realise turning points despite the weight of fundamental and technical evidence suggesting the opposite to be true at that time i.e. today's UK and US housing bull markets as of early this year that I have yet to write up because there is scant evidence in data that they actually exist, hence embryonic bull markets.

Why then Forecast if it's of little use in Trading ?

Whilst forecasting may not play a conscious role in trading, however that is not so for investing, where investments have their basis on accumulating into mega-trend scenarios such as the Inflation Mega-trend, Peak Oil, Demographics, Food crisis etc.

Analysis and forecast acts as a road maps against which to gauge an unfolding scenarios strength or weakness so as to know whether to distribute or accumulate into when for instance when a bull market is overbought or oversold. This is something that I have highlighted countless times to readers of my forecasts but I don't think people generally take notice of what am I saying in this respect that the forecast is not as important as what the market does relative to the forecast, as this gives an ongoing indicator of market strength or weakness against a snapshot of preceding perception of what the market should do.

If you are having trouble grasping the concept of reacting to price movements then I suggest get a few books on chaos theory, and perhaps also get some freely available chaos programs that draw the mandelbrot and julia sets, and then you will start to realise the way systems actually behave and thus change the way you perceive markets.

Current Stock Market Trend

Apparently, the consensus view for the past couple of months has been that the bull market is over and so stocks have definitely this time entered into a bear market, and this not just voiced by usual suspects, the crash is always coming perma bear crowd but even includes those who may have been mostly bullish such as Money Morning, who give a 99.7% probability that stocks are in a bear market. Is This a Bear Market?

It actually indicates there's a 99.7% chance we're already in a bear market.

So again it's important to realise that recent bearishness goes well beyond the usual suspects, counting even the usually bullish amongst their number.

So exactly how has this new stocks bear market been proceeding? Well the Dow's latest close of 17,215 is at its highest for the past 7 weeks, about 6% from its all time high of 18,351.

So reality is not quite matching the bearish rhetoric, as the stocks bull market appears determined to grind another premature bear market into dust.

Stock Market Trend Forecast Into End Dec 2015

My update of Mid September on the state of the 6 year long stocks bull market series concluded in a detailed trend forecast for the Dow to briefly rally into Mid September before continuing its correction into October, so as to set the scene for the Dow to rally by about 20% to over 18000 before the end of this year.

13 Sep 2015 - Stock Market Dow Trend Forecast for September to December 2015

My final conclusion is for continuing weakness that will result in a volatile trading range with a probable re-test of the recent low of 15,370 by Mid October that will set the scene for a strong rally into the end of the year that could see the Dow trade above 18,000 before targeting a gain for a seventh year in a row at above 17,823 as illustrated below:

The stock market is clearly showing relative strength which implies my bullish forecast objective looks set to be achieved significantly earlier than expected which means that the Dow could even put in a new all time high before the end of this year. Furthermore, I have a good idea the picture that the perma-bears are likely to paint as they continue to scramble after a rising stock market, will be for persistent expectations for a bear market to morph from that of a 'head and shoulders' price pattern to one of a 'double top', so will blindly cling onto the bear market is coming mantra all the way to a series of new all time highs, just as they have during every correction of the past 6 years!

A reminder of what is likely to transpire:

Look it's simple, very simple, stocks are NOT in a bubble, until stocks reach the bubble stage then they are unlikely to resolve into a bear market, having traded stocks for over 30 years, I KNOW what a bubble looks like! In fact the bubble top may turn out to be another 4 or 5 years away! Imagine that a bull market that continues for another 4 or 5 years! IMAGINE IT, now imagine the perma bear nonsense that is going to flow as stocks relentlessly climb ever higher, do you really want to miss another 4-5 year bull run?

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By Nadeem Walayat

Copyright © 2005-2015 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

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 trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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19 Oct 15, 19:08

Thank you for sharing your experience.

If I understand correctly what you are saying, trading decisions should be determined on price action and not media, forecasts, gurus, or indicators.

For investments, a forecast or general view of the market is necessary but only as a departure point. It is the difference between price action and the forecast that is the main imput for the investment decisions


Do you advocate for trend trading, (waiting for a trend to be established before buying) or buying/selling on market extremes (buying before the market trends up on the dips)?



19 Oct 15, 23:35

Nice to read that one again! Congrats, you should compile all your best trades like Livermore, would be a great read.



20 Oct 15, 03:19


TRADING - Should wholly be determined by price action alone.

INVESTING - One needs to be aware of the mega-trends, such as the Inflation mega-trend and exponential technological advancements. The forecast is a rought guide against which to measure market strength or weakness, which is why forecats need to be infrequent, else your just pressing the reset button every few weeks and learn nothing from what the deviation is telling one.

TRADING - Is always money management focused, that action which will put the trade into profit from the start which means buying a market that is moving in your direction not against your direction, else you can be right about the market but still end up losing money by getting stopped out.

This is psycholigically very difficult for most traders because they think they have missed a move, when the only thing that matters is the price between when a position is opened and closed. So it does not matter if the market has already plunged 500 points, it the trend signal in the direction favours a continuation of the trend, whilst instead most, perhaps in 1987 were thinking its already fallen, several hundred points so I have missed the boat.

Instead it is all about setting x points of risk against a x points of potential reward WITH the market MOVING in ones direction.



20 Oct 15, 03:22
Trades Drama

Ive pondered doing a dramatised video account of 1987 :) Because it is hammered into my memory.

Other trades? yes there are a few but nowhere near as crystal clear as 1987.



20 Oct 15, 17:54

Trading - young person sport

It is difficult to combine a full time job for example and trading. Trading is an energy demanding activity so I doubt one can stay focused for 8 hours at work, then trade at home (it of course depends on kind of employment). Sooner or later this kind of trader will burn out, and before the burnout he will likely have losses. New traders don't realize the importance of energy management.

On the other hand, one can claim that trading higher time frames, 1 hour a day in the evening wouldn't be a problem for an employed person. Maybe it is good for learning and practicing, but a true trader don't need employment.

Trading shouldn't involve stress or negative emotions. If they are present, it means that the trader is losing in the current market conditions. If a trader experiences euphoria, it means that he currently deals with a rare winner, rare streak of winners or an unusually big winner. So euphoria is also a sign that the trader is doing so-so.

So, if traders don't experience emotions of fear and greed, why they need so much energy? Well, trading involves not only risk, but also possibility of errors, unforeseen accidents. A trader can experience a big loss for unknown reasons, he needs energy to deal with these situations. I might have traded fluently for a year, increasing my stake. All I see is how much I will make next month. Suddenly everything ends. Your broker refuses to accept the trades, you experience 10 re-quotes per trade...contacting your broker, they claim you are trading invalid prices. You need energy to deal with emotions. you must open a new account and most likely invent a new strategy, so that the new broker won't be able to derail your trading by re-quotes.

I consider myself a day trader. I trade up to 3 hours a day, from DJIA open. I go to bed early - it suits my organism, because I am most capable mentally in the afternoon. Later I am too asleep, while in the morning I prefer some physical activity: shopping, gardening. It happens that after 8 hours in the garden I cannot focus properly on the chart. If I cannot trade properly, I don't do it. Last week I tried to trade while having a cold - I had a few break-even trades in a relatively easy market. I asked my self : what are you doing? And stopped for the next few sessions.

Is trading a young person sport? Mentally young - for sure. It is more a sport than office work. More an art than science. More open mind than knowledge. Maybe the world is moving forward, but people are being made less and less capable of becoming successful speculators.

21 Oct 15, 17:50


In my experience trading requires consistent concentration without distraction which is why I have my on and off seasons throughout the year.

As I get older, the off seasons are tending to get longer.



21 Oct 15, 20:33
Own style

In my opinion, everybody should have their own style that suits their needs. I believe that you, Nadeem, are holding positions much much longer than me, hence your need of an off season...

Me, personally, I never liked holding positions overnight. It doesn't matter if the trade is in negative territory or locked at BE. I think that holding positions is wearing traders down, they may think that everything is fine, but the trade is always there in their minds, day and night. My style means that after 1, 2, 3 or rarely more hours every day, the market doesn't exist for me.I don't know where the Dow is trading now. It happened in the past that after two bad months I took a month off. But my last month off was Feb 2014 because of moving homes (I do hold occasionally long term trades, but their small size makes me almost forget about them).

In trading forums I have spoken to people who think very differently. They believed that short time trading is very stressful and requires 8 hours a day of being glued to the screen. They also said that they wouldn't be chasing a minor move, because they were after a big move, the entire trend. But I saw how much time and energy they spent on fundamental analysis (or other stuff so sophisticated that it would normally fry my brain) in addition to their fervent debates in the forum, only to finally see the market move against them. Then they kept saying that the market was crazy, untreadable and detached from reality.

I didn't participate in daytrading forums, so nobody could influence my style.

Also I believe that everybody should have treir own technical style : own setups, own type of exits, but most of all their own understanding of market's behavior, so to be able to adapt to the conditions. There is no setup that works all the time in all markets.

Prosperous trading!

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