Since I “do a lot of trade-shows”, I get the privilege of speaking to thousands of people who devote no small amount of time in the stock market.
If I ask them “Why are you in the stock market?”; the inevitably answer, “To make money!”.
Yet, so very many of these folk do not “make money” in the stock market. I believe there are some very simple and controllable reasons why so many people do not make money (serious money) in the stock market.
This week, I received an email from a subscriber that typifies what I am talking about:
“Hi Mike, I am a Swing Trader and I trade full time. I spend a lot of my time looking at the market and various sectors and stocks. I consider both fundamentals and technical dynamics of all my trades. For the most part these days I am very, very particular in the stocks I pick and because of the tremendous volatility, I gravitate to stocks that are owned by companies that are very strong financially and have been around for a while or are the leaders in their sectors. Not always the greatest gainers but also not the greatest losers either.”
“My question is how can the Market can go up one day 70+ points and the very next day go down 70+ points and then the next day go up 70+ points. This is just not really logical, yet this seems to be happening more and more. I believe that it is because the market is driven by the institutions that use high level computer systems, with formulas that cause the market to make major swings each day. What bothers me on this is that, I am concerned that perhaps the Institutions are not in full control anymore of their systems, and are not really adjusting their systems to consider the kind of financial environment we are in. Therefore, they are using a base or foundation that is not in sync with our financial environment at this time. I would like your thoughts on this.”
“I must tell you at one time I enjoyed what I was doing, but it has become almost a nightmare trying to figure out what the market is going to do to day to day, forget week to week or month to month. “ [End of Subscriber comments]
Not that I am a fan on the author of this quote, “The market can stay irrational longer than you can stay solvent.”, Maynard Keynes, I do believe in the statement.
Traders, as well as stock market ‘investors’, often fall into the trap of trying to justify a bad trade or a series of bad trades by blaming exogenous events… or, as in the case of this subscriber, perceived ‘irrational’ behavior of the ‘big boys’.
We all tend to think that the market is more irrational today than it ever has been. Indeed, I certainly believe that we are dealing with issues in today’s market that are unique and highly consequential to the future of the markets and even to capitalism, as we now know it.
But, as tough as this market has been… I still see that with the proper rules, tools, discipline and methodology, we can make money in the market and actually enjoy the process.
I empathize with this subscriber’s frustration and even though this year has seen its share of trading difficulties, am very optimistic that we can and will be able to find ways to make a better-than-decent profit even in the face of up/down swings in the market like we’ve seen lately.
If you follow my writings, you know that I am a rules-based trader. I make the rules, but the rules make the trades. I don’t expect every trade to be a winner, but I do expect more winners than losers and if my rules, tools and methodologies do not come through for me, I look at how I can tweak my rules… not tweak my trades.
You may also know that I rely heavily on the theory of time-cycle analysis to help me pick market tops and bottoms. After all, timing is not just important… It has everything to do with making consistent profits in the stock market.
Recently, my R&D team made, what I think, is a monumental time-cycle discovery. We now know how to identify discrete time-cycles that are far more profitable than we ever thought in the past. So, we have tweaked our trading rules to incorporate these “SuperCycles”. Back-testing of these cycles have shown amazing results.
My point is this… If you are not making money in the stock market, before looking to blame others, first take a hard look at your own rules, tools and methodologies. Are you staying disciplined? Do your rules need tweaking? Is your methodology for trading needing a critical review?
Let me give you a specific, personal example… Like a lot of traders, I got caught in the recent crash of silver. As a result, my silver trade was crushed. After the dust settled, I didn’t look at the outside world for blame. I didn’t say, “It was that *&^%[email protected] decision by the CME to raise margin rates!”
No, I did a reassessment of my trading rules and realized some tweaks were necessary to keep an event like the silver trade from happening again.
Specifically, I adjusted how I set my stops on a multi-leg trade. I adjusted the size of my trade by the size of the time-cycle inversion. And, most importantly, I implemented my SuperCycle trading signals. Then, I back-tested these changes for the past 6 months to see if they had any impact in my return on silver (specifically, trading the SLV). The results of the back-testing show that instead of a net loss in iShares Silver Trust (SLV) for the year, I would have been up over 90% in my SLV trades using my, now modified, new rules, tools and methodologies.
My point is really fairly simple… If you want to be a successful (highly profitable) trader or investor of stock market equities, you really must have a solid set of rules, tools and methodologies… AND, just as importantly, you need to maintain the discipline to follow them.
If you would like to see my core set of Rules, I suggest you pick up a copy of my book, 10: The Essential Rules for Beating the Market. It is available on Amazon. It is a quick read and will provide you with the foundation you need to become a rules-based, successful, stock market investor and/or trader.