The truth is that little, if anything, is certain in the markets.
A few things that seem to be pretty close to certain are:
Sometime you will cut your profits and sometime you will let your losses run even though you know you should do the opposite
I have an unconfirmed suspicion that those whose personalities work
in terms of beliefs in market certainties like "it'll come back," or
"there is only one way to make money in the markets and that's to ....,"
or "there is no way anyone can make money trading" are less likely to be
successful than those who simply accept that there are no real
certainties. Of course, I am speculating and many may disagree, but I
am guessing that those who pronounce "certainties" may be too rigid to
accept the vagaries of market movement and may have difficulty in seeing
alternative ways to deal with situations. Again, it is just my
speculation, but I believe that those who are less rigid, who are able
to reverse positions or who are willing to adjust strategies when they
encounter a changing or unpredicted situation are more likely to succeed
in the long run.
A "buy and hold" investor, for example, is bullish by nature.
Essentially, their argument is that if they buy stock in a fundamentally
sound company, the stock price will go up over time. Over what time is
not ordinarily defined, but from a long term historical perspective, the
argument is sound though it certainly has many exceptions. For example,
if we look at the Nasdaq Composite (COMPQX) we see that it is up
relatively substantially since its low in 2002, yet it is nowhere near
its high in 2000 and it is currently trading at approximately the same
level as it did 10 years ago in 1998. The results, therefore, for a
"buy and hold" investor would be quite different depending upon when
they made the decision to buy.
Would it be worth the trouble to learn to trade the market in both
directions? An investor could have traded bullish strategies on the
COMPQX as it rose from 1994 to 2000 and then traded bearish strategies
from the break in 2000 until 2002 or 2003 and then climbed aboard the
bull again into 2007. The whole move up from 1994 to 2000 was
approximately 4300 points; the move down from 2000 to 2003 was about
3750 points and the move up from there to the present about 1200
points. While the bullish buyer in 1994 would have about an 1800 point
gain today, the trader who used strategies to trade both directions,
even if he captured only 50% of the moves would be up over 4600 points
over the same time. Certainty that buying and holding is the only way
to go could have been costly in that scenario.
Please understand that I do accept buy and hold as a very viable
strategy. I just believe there are many other strategies, including
ones to benefit from bearish moves, that might be worthwhile for each of
us to consider. In "Trade Your Way to Wealth," my recent book, I
examine a number of these strategies and emphasize the importance of
money management and risk control. Understanding and using these
concepts may very well add to your trading abilities if you are willing
to accept the proposition that certainty in the markets is, most often,
illusory.
You can comment on this article on my blog!
Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
"Trade Your Way to Wealth" by Bill Kraft is an Amazon.com best seller!
Mr. Kraft's past articles are posted on our website for your review.
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