Tuesday, October 22, 2013

Who or what is right or wrong

When people make a profit from their trading they like to say "I was right". Yet when the same people lose money, or a position goes against them, they like to say "The market is wrong".

Accepting that you can (and will) make mistakes, or simply be proven wrong when putting money on the line is a critical phase in the development of a trader. Failure to accept you are wrong on a position will end up with small losses growing into bigger losses, and in extreme cases to a significant erosion of your capital, or even blowing up your account.

The bottom line, whether you win or lose on a trade, is that you have traded your beliefs or methodology on whether the price movement will move up or down, and the market has either moved in your favour or against you. If price does move against you, it is perfectly acceptable to take a small loss, and wait for the next set up. 

However, there a lot of traders who profess to being able to call tops and bottoms in a market, or who make predictions about what the markets will do, as if following some prescribed formula, or a squiggly line on a chart. Buyers and sellers determine price movements.

Remember that the market and its movement are the sum of all the investing and trading decisions being taken by everyone participating in the markets. The market does not care whether you are right or wrong.

Often we hear people saying that the market is going to go up or go down. They base their investment or trading decisions with what they think the market is going to do. Then when the market doesn’t do what they think it should do, they try to tell us that the market is wrong. They don’t admit that they are wrong. The market does what it wants to do and it is always right - the price of a stock or instrument may be perceived to be over or under valued, but the current price is a fact. 

We may not agree with what the market is doing at any point in time, but it is futile to say the market is wrong. If the trend of the market is up, that is the correct trend and we need to go with it. If the trend then turns down, we should get out and not try to rationalize that the market should not be going down.

On the other side of the coin, what if you are in a profitable position, and the market keeps moving in your favour, yet the perception is that the market should be doing something else? 

Then, you are in the fortunate position of being on the right side of the market - you and the market are in tune. Don't cut it short or try and predict the end of the move - just let it run until you get a signal that the run is over.

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