Wednesday, April 07, 2010

A question for you

EDIT: Since I wrote this article the best part of three years ago, I have obviously written an e-book on my methods, as well as set up a Members Area in which I now record my own trades. Double standards? I think not. My method steadfastly remains to follow a trend. I therefore do not, and never have, predicted the direction of either the general market or any individual stock. As long as I trade, my method will remain to scan for potential new trends, to act accordingly, and to only exit when that particular trend has ended (i.e. NEVER to predict the end of a trend).

If you look through the archives on my blog, you will notice that the purpose of these posts is not to dispense specific trading advice, but to give you a flavour of some general concepts that I believe all traders (but especially those new to trading) should at least consider. If I can provoke some thought on the part of the reader, I have done my job. The vast majority of trading blogs are not like this.

If you take a tour of a sample of say 100 trading websites and/or blogs, I suspect that at least 95% of them are 'predicting' the markets and/or giving profit targets on specific trades. If these hit the target, you are a hero, you gain a following, you can make money by turning your blog into a subscriber service, etc, etc. Nice if you can do it.

I know of one trading blog that gained quite a following in late 2008/early 2009 after the blogger caught the market fall and made a killing (I believe he has now opened a hedge fund on the back of this). According to one of his posts in early March 2009, he exited his short positions on the SPX at 670 (the low was 666). Unfortunately, since the SPX hit the 740 area in the early stages of the subsequent rally, he has being attempting to short the market repeatedly, re-doing his charts to 'prove' his theory time and time again.

Although his 'method' is based on technical analysis, he uses economics and fundamentals as a backdrop to his theory. He believes there will be a catastrophic plunge - the last time I looked, I think he gave a target of 4,500 on the Dow.

The number of daily hits on the blog initially rocketed, and there were 100's of comments posted by enthusiastic followers on a daily basis, with the posters jumping into the market using the blog's predictions, using excessive leverage. Nowadays, the blog postings are very infrequent, and the comments have fallen to a few a day. A lot of the previously enthusiastic posters are now out of the market, their trading accounts blown up.

It reminds me of the book that was published at the height of the bubble, predicting that the Dow will hit 36,000. People took out second mortgages and plunged all their money into Sun Microsystems and the like.

Both these predictions (Dow going to 4,500 and 36,000) may well be right - eventually. How many traders or investors, following either of the predictions, are still holding their positions in the market? In addition, these bloggers are now married to the beliefs and predictions they posted on the web. Inevitably, they opened themselves up to potential ridicule, and the blogs de-generate into a slug-fest, with insults being hurled about.

There are lots of examples of (in)famous market predictions - older traders will remember Joe Granville and the famous 'Granville reversal' in early 1982. He gave a sell signal right at the bottom of the market, and as the market rose, he got even more bearish!

Ed Seykota in his Market Wizards interview said that "Good letter writers write letters, good traders trade".

So the question for you is:

What is more important to you - do you want to be proven right in predicting the market, or do you want to make money?

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