OPENING POSITION

June 2012

If one thing is certain in the financial markets, it is that there will be a crisis. Yet, knowing this, why is it that we are never prepared for it? Because we prefer to believe it will never come. Investors flock in droves to the financial markets for one reason: to make money. As a result, they are driven by greed when times are good and get hung out to dry when times are not. But this is why the markets exist, and this is exactly what those who actually make money in the markets understand so well.

Think of what the markets would be like if, instead of viewing the market as a place to make money, people thought of it as a place where you didn’t? If that were to ever became a reality — which I doubt it will — I could say with confidence that the markets would bear a very different personality. Yes, I think the markets would not be as volatile as they are now, and there could actually be a greater percentage of people making money in the markets rather than losing it.

It is human nature to be lured by the idea of becoming rich, and we are led by the belief that there is only one way for prices to go, and that is up. We are conditioned to believe that investing our money in the stock market will make us money in the long run. This is backed by studies that show that if we were to invest a certain amount of money at a given time, in 10 years or so we would have gained a decent return. But what if we didn’t put our money in at that time or at that price? What if we had invested close to the top of a bullish rally instead? It is during these market tops that the retail trader or investor gets taken advantage of.

Volatility plays a huge role in the markets, but we tend to focus on upside volatility. Perhaps it would be worth our while to shift our attention to downside volatility for a while. Instead of looking at price moves from a low to a high, perhaps we should focus on the bearish price movements. By getting a better understanding of these downside moves, we may be in a better position to think of the markets as a place not where we can make money, but where we don’t lose any money.

 Jayanthi Gopalakrishnan, Editor

Originally published in the June 2012 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. © Copyright 2012, Technical Analysis, Inc.

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