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Weekend Newsletter for June 9, 2007 Please forward to a friend! (Subscribe)
The Week At A Glance According To The Charts
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What I Think
Doesn't Matter
What I Think Doesn't Matter -- by Bill Kraft
Copyright 2007, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
When it comes to the market or to a specific trade, what I think
does not matter. It probably doesn't matter what you think either.
Just because you or I or an analyst or a network broadcaster thinks the
market or a stock is going to go up doesn't make it so. In a
fascinating book, The Black Swan, author Taleb, points out the impact
of the highly improbable and demonstrates, in part, the importance of
what we don't know. We may have a grasp of all the fundamental
information that exists at the moment and may find the perfect technical
entry into a stock position, but that does not guarantee or assure that
the stock will move as we expect. The next moment could bring news that
results in movement directly opposite to what we predicted.
Anything can happen and none of us can predict what it will be.
When we buy a stock, we are predicting that the price will go up. Many
times we will be right. The company may have solid fundamentals and be
climbing an uptrend. We are the beneficiary of a successful prediction
when we buy the stock and it continues to follow the trend up. Suppose the
company was engaged in a diamond mining operation just below the surface
and that there was an abundance of diamonds. Neither the government nor
labor posed any problems and the price of diamonds had been rising
steadily. Our company had no debt. Sounds like a great company and it
could be a scenario for a strong stock price move. As the stock price
climbs, we applaud ourselves for such a marvelous prediction. We may
even brag to our friends about what a successful investor we have
become. Suddenly, seismic activity becomes apparent in the area of the
mine and within days, a volcano erupts destroying the mine and covering
the diamonds in molten lava. Now, how good was our prediction.
If you think the example I dreamed up is far fetched, how many
investors predicted the events of 9/11 and if you did, did you also
predict the date it would occur? The highly improbable does occur and
when it occurs, it usually has an effect. How do we avoid those
circumstances? We probably can't. What we do need to recognize is that
all trades will not go your way --period. Mathematical trading systems,
for example, ordinarily do not take into account the improbable (at
least beyond two or three standard deviations) and the psychological so
it seems that the creation of an infallible system is far beyond our
current abilities. No matter what anyone tries to do, some trades are
destined to be losers.
We need to accept that some trades will lose. We should not beat
ourselves up because a stock went the other way. What we can do is
manage our trades and manage our trading money so that we are able to
stay in the game and so that our gains exceed our losses. I have written
about Money Management and Reward to Risk ratios in the past and refer
you to those archived articles to refresh your knowledge if you are
interested. Those two concepts, reward to risk ratios plus proper money
management are as important as any in trading. To my mind, they are
much more important than trying to find a specific asset to buy or
sell. Since we know we must suffer losses, let's work to keep them to a
minimum and, once done, use a reward to risk plan that will help us
enable to profit overall even if we only enjoy winning trades 50% of the
time (or even less).
Good Trading!
Bill Kraft
Mr. Kraft's past articles are posted on our website for your review.
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