Technical Analysis Questions of the Week:
Normally, which type of interest rates LEAD (change first), the short end (short-term rates) or long end (long-term rates)?
Equity markets keep breaking 2 1/2 year highs, and the Bears are getting their shorts ripped right off. So, is now the right time to be a bull or a bear?
Depending upon whom you ask, what their time horizon is, how much leverage they use and how well they can tolerate volatility, the answer can be a bull, a bear, or just someone sitting in cash until they feel more comfortable with the stock market.
Trying to call a market top can be a killer. Not knowing the signs of a market top, and being caught flat footed when the sharp selling starts, can also damage your profitability, but not as much as sticking with the wrong side of the trade.
I certainly don't see a problem with playing the bearish side of an overbought market, as long as the sell signals are there. But it's a dangerous game, and if you're going to do that, you have to be willing to exit your trade right away.
The real question is how fast you are able to admit mistakes when on the wrong side of the trade and take immediate action to remedy the issue?
One of the biggest killers of profits is an unwillingness to change one's stance on the financial markets.
You would think that, in an ever-evolving economy and financial market environment (where currency affects commodities which affect interest rates which affect stocks, and so on), the players would ALL be willing and have the ability to change their stance in the blink of an eye.
But for the most part, the opposite is true. Investors and traders find themselves asking "Why on earth would I exit a position that I spent so much time researching and that I just entered into yesterday?"
They are not about to admit to being in a position that’s so ridiculous, and to exit the position would be to do just that. But this is totally normal for the business, and to "stick to your guns" when the NEW writing on the wall says it's time to exit is a rookie mistake that is often made by even experienced veterans.
So why do people "stick to their guns" even when they know, deep down inside, they are not comfortable with their trade or investment?
There are many reasons, but one is that they don’t want to be "that guy/gal" who trades too much. For example, people who consider themselves the kind of trader who trades every few weeks might have a hard time bringing themselves to trade several times per week, so that keeps them from exiting losers.
Traders want to avoid feeling like they have "the minus touch" -- buying something one day, swearing it will work out big time, only to realize the very next day that they need to hit the "eject" button. So, to avoid that feeling, they actually just don’t hit "eject".
If everything you touch turns to coal, then the best thing to do is to take a step back and stop trading and regroup. Bottom line: you have to be out if you think you are on the wrong side of the trade.
Some people will stay in a bad trade even though their trusted indicators are telling them to exit. They get used to a market trend -- be it up, sideways, or down -- and they stop listening altogether to what the indicators are telling them. The problem is, many people have a perfectly good trading system, but become mentally unable to admit that a trend has ended and it’s time to close the books on that trend.
My Internal Strength System shows you how to position yourself so that even if you fall victim to human nature and are unable to mentally accept what the indicators are telling you, you are still only taking minimal risk. Even when you are dead wrong about the direction of the stock market, you are risking a fraction of your account, so you can still make money.
In my ISS course, I show you how to hedge your account from market direction, and how to build a disaster proof portfolio, even when you are just like 95% of all humans who eventually stop listening to the indicators.
Right now my course is closed to new students, but at some point in the next couple of months we will open it back up. In the meantime, the best thing to do, if you are currently one of the traders who has "the minus touch", is to go over the trades you've made in the past quarter and write down what you think you did right and what you did wrong. I recently did this, and I'm telling you: To be a successful trader, doing this is an absolute must.
I hope to see you in class when we do open ISS up again.
For now, be careful not to paint yourself into either a bullish or a bearish corner. In many endeavors, "sticking to your guns" can be an admirable quality. But in a market like this, it can cost you big time.
Answers (to TA questions from above the article):
The short end.
Because short term rates are more sensitive to trends in business conditions and changes in the Fed's monetary policy. Decisions to change the level of inventories, for which a substantial amount of short-term credit is required, are made much faster than decisions to purchase plants and equipment, which form the basis for long-term corporate credit demands.
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