Preface
Ah, the good ol' days!
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If your experience is anything like mine, you know that trading in the stock market falls way short of a completely satisfying adventure, especially during the first million years of your trading life -- that's how long it may seem! Right?
I mainly recall painful losses and feeble profits. I especially remember the bad decisions! I did learn, however, that it's much easier to be wrong than right. Playing the market correctly is mostly a matter of getting rid of dumb mistakes.
There I was, earning money on the job by day, and dumping it in a rat hole by night, making one silly move after another! Like focusing only on short-term graphs and ignoring long-term trends. Or selling stocks short when I should have gone long. IBM, for example -- I shorted when we all thought the company was going broke!
Yeah, those were the good ol' days!
All the while, of course, I kept looking for a more sensible approach to trading. Get kicked in the butt often enough, you begin to look for a way out! There had to be a better approach -- a more sensible way to deal with stocks! There just had to be!
And let me tell you, I tried everything!
Professional Charts
The main thing was the charts -- I must have plotted hundreds of them. Over a hundred every day, and others once a week. It was a handful, let me tell you!
Help came eventually in the form of printed charts prepared once every six months by some enterprising but long-since forgotten individual. The charts helped. And I was eager to study them. But you should have seen the mess they were in after just a month or two! Not because I was sloppy -- though likely that did contribute -- but mainly because a lot of changes can occur in six months -- like stock splits, stock dividend payments, and other price-shifting events. And naturally I had to keep the charts up to date or they'd be useless. This was before the personal computer, mind you. It was also before fancy indicators became public knowledge, indicators like Fibonacci ratios and Gann angles. I mean it was way back!
I may have grown a bit and possibly now have a better grasp of charts and indicators. At least I hope so. Perhaps, too, I've seen enough to put together a rational basis for trading. Or is that just another stage of an ongoing delusion, a new chapter of a foolish dream that we can make sense of the markets?
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Can it be that trading shares of equities is inherently irrational? It may be that the wellspring of actions itself is non-rational, despite the fact that we seem bound to apply rational-type models or rules to try to gain control over events that confront us.
Models themselves are like channels, or guidelines -- rules we use to try to harness our creative spirit, our irrationality. They are rational things to try to contain the non-rational. That's the way it seems.
Most markets are considered orderly, not chaotic; trades do get executed without drawing blood, and they do yield buying and selling regularity. (Richard Ney says it is inventory control in a vast merchandising program run by the specialists.)
Trading Rules
You must follow specific steps when placing orders to buy or sell equities -- that part is rational enough. The steps are part of a formal process instituted by the trading establishment. The orderly trading mechanism is already in place.
The lack of regularity is in the process of deciding which equities to buy or sell and when to execute the orders. I believe that certain guidelines, or rules of behavior, can be established that at least have some logical connectedness and offer a bit of hope for rationality, particularly if you like to sleep peacefully.
Let Your Broker Make the Decisions!
One way out is to turn your trading decisions over to a broker and pay him or her to do your thinking and make your decisions. Many people opt for the approach. It's easier. The same goes for putting money in funds -- the amount of money in mutual funds comes to trillions of dollars. If you're busy or don't function well in the markets, isn't it better to let a professional do it? You pay a physician to take charge of medical ailments, and you pay trained pilots to transport you here and there. So why not pay a broker to handle your financial matters?
Ah, would that it were so easy!
The argument may be sound, and I won't dispute it. But where's the guarantee your broker or the fund manager can "fly" better than you?
If you'd rather exert a greater influence over your resources, and are willing to take on the challenge of doing your own thinking and making your own choices, it seems that some sort of trading guidelines would be welcome. The guidelines would be rational channels -- guiding rules -- within which you could do your thing. That's what I'm trying to provide.
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Here's a quote by Tom Au that can help you in dealing with the stock market:
Bulls react strongly to positive reinforcement, because they're right more often than not, but they sometimes underestimate the impact that the occasional bad year can have on the averages. Bears, on the other hand, have a more realistic sense of the long-term averages, but sometimes overlook the fact that the market environment is actually favorable most of the time, even in secular bear markets (when stocks go up slightly more than 50% of the time, rather than almost all the time, as is the case in bull markets). Finding a good balance between optimism and pessimism is key to investment success.
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