Market Cycles
The market works in cycles and each of these cycles can be broken up into smaller cycles over shorter time frame. The same pattern can be seen in 5 minutes charts or monthly charts; it doesn't matter what the time frame is. This illustration below is not really a wall street cheat sheet. It's one of the best illustration out there of the financial market. It is the smart money that buys near bottoms when everyone is selling and calling for a crash (accumulation). The average investors that chase gains when the market has risen for quite amount of time, and find themselves getting trapped when the market go sideways and starts to decline. They end up holding losses hoping it will go up, and end up with more losses when the market continues to decline. It is near the top when smart investors unload their positions to the average investors who believes that the market will go up forever (distribution). The key to profiting over a long term is to position yourself before or right after a breakout at the first pull back when valuations are low and sell when valuations are high.
"Buy when people are fearful, and sell when they are greedy." As true as this may be, your trade plan has to be backed with some technical analysis. You can't throw darts blindfolded and expected to hit tops and bottoms. There's no way to tell when these two emotional forces of the crowd are at their extreme highs and lows without some knowledge. This is when charts and indicators come in handy. Click on the Technical Analysis tab to see how to do this. It is especially helpful to look at the crowd sentiment at times to find out whether they are bullish, bearish or neutral.
The "Average" Investor
It is not a myth that most average investor goes into the stock market to lose money or underperform the broad indexes. It's a known fact that 95% of day-traders lose money. For some people, it is almost like they are fated to fail from the beginning. The truth of the matter is that the correct way to trade defies our natural instincts to chase gains and run away from drops. Most investors find it hard to buy when prices have fallen and sell when prices are rising. The misconception is that when prices have fallen or crashed for some time, it has become dead money, and when prices have risen for quite a number of time, it will keep rising forever. For the majority of the people, it is their own mentality that keeps them from amassing riches; they are literally trapped by their own body and mind.
Now, I am not taking about trying to buy at the cheapest price possible and eat up months or years of side way movement. You will only find yourself frustrated and lose money with the inflation . If you don't know this, most currencies depreciates over time, US dollars depreciate by around 2% per annum. Scan the market for breakouts, learn how to spot chart patterns that are primed to breakout or have already broken out; there is always a bull market starting somewhere in the world. With the invention of exchange traded funds, it has become really easy to gain exposure to different commodities, sectors or even entire countries.
The secret to making money in the long run is no secret. You have to overcome your emotions and be objective with your trading. Have a solid strategy before entering a position, and not be swayed by the short term swings. There are several things you can do to minimize these emotions. Meditation is helpful, but there are easier and more effective ways to reduce the risk and pain.
Now, I am not taking about trying to buy at the cheapest price possible and eat up months or years of side way movement. You will only find yourself frustrated and lose money with the inflation . If you don't know this, most currencies depreciates over time, US dollars depreciate by around 2% per annum. Scan the market for breakouts, learn how to spot chart patterns that are primed to breakout or have already broken out; there is always a bull market starting somewhere in the world. With the invention of exchange traded funds, it has become really easy to gain exposure to different commodities, sectors or even entire countries.
The secret to making money in the long run is no secret. You have to overcome your emotions and be objective with your trading. Have a solid strategy before entering a position, and not be swayed by the short term swings. There are several things you can do to minimize these emotions. Meditation is helpful, but there are easier and more effective ways to reduce the risk and pain.
1) The most important thing is to have longer holding periods; anywhere from a week to 6 months. Do not day-trade unless you have some experience. You might think you can outsmart the market, but the truth of the matter is that you will be wiped before you know it (especially if you are on margin). Statistically and psychologically everything is against you, there is no way of guessing the day to day swings. However, it gets easier to predict market moves over longer timeframes, and your entry mistakes won't matter as much as the market tends to move up in the long run given that you enter a position in a bull market. Click here to learn how to distinguish bull markets from bear markets.
2) Diversify your account with various industries, sectors, and companies. Your portfolio will be more balanced and the day to day swings of each of your positions won't give you wild swings. It will give you a smoother curve and better sleep. Exchange traded funds are the easiest way to diversity to gain exposure to a whole index, a sector or various companies with a single position. The best part about it is that it can be traded like a stock. Click here to see why diversification is helpful and what is a good number of positions you want to keep in your portfolio. |
3) Have your stop losses. 7-8% is a good rule of thumb, but it is helpful to understand support and resistance. Don't put your stop losses on round numbers. More often than not prices do hit round numbers. The smart thing to do is to put stop losses under major historic supports. Click here to see how to do this.
4) Have patience and diligence. Nothing in life is easy. Do your research about the particular market or company before you decide to enter a position. Don't try to squeeze every bit of gain from markets that have already gotten up for some time. Don't chase high flyers that everyone including CNBC talking heads are talking about. Don't be afraid to miss out on gains, there are great opportunities every day, you just have to find them. Use buy limits when necessary and let the market come to you.
5) Don't extend your losses. Leave your ego at the door. Everyone make mistakes. If your position goes down 7-8% after you have done your research, and believe that you have bought at the most opportune time, it's most likely going to keep going down, and there's probably a good reason for it. The good news is that you can still make money even if you are right only 40% of the time, because your winners will keep on moving up. Click here to identify market top and how to lock in gains.
6) Be strict but be flexible. This is something I can't help you with. You have to be consistent most of the time to make any money at all, but you also have to understand that the market can act erratically when it wants; it's not always going to follow a set of rules from a rule book. Be aware of the underling forces moving the market and understand that anything in the market is possible. Keep an open mind, and be prepared for the worst. If you can't stop worrying and have a good night sleep you are doing it wrong. Never invest what you can't afford to lose.
Market Manipulation
If you think market manipulation doesn't exist you are taking the wrong pills. It had been in the past, and have only gotten more sophisticated over the years with technology. That means that it has also become incredibly easy to hide within the noise of the market. If you have the buying power to move prices dramatically enough to persuade others to follow you, only to be selling your position after everyone (the bag-holders/the chasers) have loaded up, you would probably do it too. Why not? It's not illegal to buy and sell.
Analysts will scare prices down to load up at cheaper prices. On the opposite side, analysts will pump prices up, for example by raising the price target with their "fundamental analysis" only to crash the prices as they unload simultaneously. These are only a few examples out of several ways to manipulate the market. There is really nothing you can really do about how the market works. You are voluntarily in a manipulated market. There is too much noise in the market; you have to use your own intuition and develop some analysis skills.
Analysts will scare prices down to load up at cheaper prices. On the opposite side, analysts will pump prices up, for example by raising the price target with their "fundamental analysis" only to crash the prices as they unload simultaneously. These are only a few examples out of several ways to manipulate the market. There is really nothing you can really do about how the market works. You are voluntarily in a manipulated market. There is too much noise in the market; you have to use your own intuition and develop some analysis skills.
The good news is that none of the manipulation matters over longer time frames, these price manipulation themselves are noises; the prices tends to go back to where it was meant to be. This means that the price that price that you are looking at is just artificially deflated or inflated from it's real value at any given time. This is the nature of the market. It is impossible to manipulate major market moves. The larger the market cap , the harder and the more bucks you need to make such noises.
There is no point blaming the money manipulator for anything. Not all of the financial players in power are advocates of manipulation. Give them the benefit of the doubt, meanwhile, don't let it affect you. Follow the 6 steps that I have given you and you will be well on your way. |
Ask yourself. What would you do if your position drops 5% shortly after making an entry. Would you give the white flag and sell? If you did, what if the market rises 5% the next day, and another 5% the following day. An average investor would try to chase the same stock, because he have developed a grudge against that stock, only to be shaken out again days later. You have to devise a strategy that gets you around these random moves in the market, and take away the emotional aspect of it. Expect all scenarios and always have an exit plan. The market is simply a medium where money flows from one person to another. There are losers in the market, an equal amount of winners (monetary terms). You could say that it's a fair game. You have to separate yourself from the masses. Figure out how you are going to do this.
Remember, owning a stock doesn't really mean that you own a piece of a company. What you own is a product that has the company's name branded to it. It is a piece of paper that only has a value because people believe it does. The price of that product is going to be whatever people are willing to pay for it. Emotions in the trading world can be unhealthy. Remember risk/reward ratio. Remember being objective with your trading. Have a strategy. Click here to get more content from me. Check out my blog for weekly updates and my analysis of the market.
Remember, owning a stock doesn't really mean that you own a piece of a company. What you own is a product that has the company's name branded to it. It is a piece of paper that only has a value because people believe it does. The price of that product is going to be whatever people are willing to pay for it. Emotions in the trading world can be unhealthy. Remember risk/reward ratio. Remember being objective with your trading. Have a strategy. Click here to get more content from me. Check out my blog for weekly updates and my analysis of the market.
Ignore the daily gyrations, explore all scenarios, have a strategy, be patient..
If you are too worried about your investments and can't sleep at night, you are doing it wrong. Your investments should be well balanced with core position covering up atleast 80%-85% of your portfolio. Most people that goes into the market wants to day trade and just play around. This is what the rest of your portfolio should be about. Your core position could be many things, but they should be well diversified and well researched. Some people like to have a core position of dividend stocks. Compounding can work wonders especially if the stocks pay dividend. This kind of portfolio will require the least amount of work from you, and give you steady gains in the long run. These are basically buy and hold. In case, you don't know you have to hold for months, enter a position before certain dates to be qualified for dividend on a dividend stock. Some companies pay up to 10%.
The daily gyrations in the market makes it appears random and out of control to most people. Under these gyrations are the market's real moves. Wild swings up and down produce emotional anxiety and cause one to doubt one's own knowledge about the market, they start to worry and become uncertain about the market and leave them feeling more confused. The shorter the time frame one looks at, the more meaningless the information and the market moves one looks at become. If you follow the twitter or other investment tweeting sites you will see these wild emotions, people get caught up in these daily gyrations and try to guess the next market move based on them, only to be proven wrong over and over again. A lot of frustration, anger, greed, and no hard work. Sometimes, I wonder if these people are in the game for the hype and pain. Surely, they must be addicted to the pain. Look, the market will give you exactly what you want. If you want to make money; you will try your best to accumulate enough knowledge and the skills, and be disciplined enough to make money.
Expect all scenarios, and understand that the market can easily move against your bet, and you could be wrong. Don't let your ego cost you lump some of money. Be patient. Let the price come to you. Set your traps; don't try to chase it. A good way to do this is to use limits. Using limit orders are the best way to exercise your strategies while taking away the emotional aspect of clicking the buy and sell button. As you may know by now, your emotions can become your worst enemy in the trading world. Always reflect and try to learn from your mistakes. Try to understand why your trade went wrong, and figure out if it is a technical flaw or just plain impulsiveness. The latter is usually the case for most investors.
The daily gyrations in the market makes it appears random and out of control to most people. Under these gyrations are the market's real moves. Wild swings up and down produce emotional anxiety and cause one to doubt one's own knowledge about the market, they start to worry and become uncertain about the market and leave them feeling more confused. The shorter the time frame one looks at, the more meaningless the information and the market moves one looks at become. If you follow the twitter or other investment tweeting sites you will see these wild emotions, people get caught up in these daily gyrations and try to guess the next market move based on them, only to be proven wrong over and over again. A lot of frustration, anger, greed, and no hard work. Sometimes, I wonder if these people are in the game for the hype and pain. Surely, they must be addicted to the pain. Look, the market will give you exactly what you want. If you want to make money; you will try your best to accumulate enough knowledge and the skills, and be disciplined enough to make money.
Expect all scenarios, and understand that the market can easily move against your bet, and you could be wrong. Don't let your ego cost you lump some of money. Be patient. Let the price come to you. Set your traps; don't try to chase it. A good way to do this is to use limits. Using limit orders are the best way to exercise your strategies while taking away the emotional aspect of clicking the buy and sell button. As you may know by now, your emotions can become your worst enemy in the trading world. Always reflect and try to learn from your mistakes. Try to understand why your trade went wrong, and figure out if it is a technical flaw or just plain impulsiveness. The latter is usually the case for most investors.