Opening Position
June 2009
As I write this, the first day of warm weather erases our grim memories of winter faster than you can say Jackie Robinson. But as is most often the case, there will be at least one more cold spell, making us dig out those dreaded boots and heavy jackets one last time. Similarly, you quickly forget the bear market when the markets start a sustained rally, sending people rushing to put their money in the markets. But the bear could very well show us that he is still in control.
When the markets started rallying after hitting their lows in early March, it was not surprising to hear people opine that the worst had to be over. But is it really? During such times, it is important to not get distracted by what others are saying because as we all know too well, there is a lot of inaccurate information out there. To truly succeed in trading you have to come up with your opinions and, most important, accept that you could be wrong. A rally, especially during a long downward trending market, will stir up some excitement, tempting you to throw money at the markets lest you lose that prime opportunity to make money. If you find yourself feeling this way, hit the brakes and take a step back.
Think hard about what you are doing. Yes, the price is attractive and yes, there’s a chance you will make a decent amount of money. But do you have a system in place that you are following? Do you know how much you are risking? Do you know what your potential rewards are? Have you thought about position-sizing? What about exit targets? Where are you going to place your stops? There are tons more questions you should be asking yourself before you place a trade, whether it is the first one after a long hiatus or it is something you do every day.
Unfortunately, there are too many people who think of trading as a “get-rich-quick” scheme. Nothing could be farther from the truth. Think of trading as a game of chess, where you make strategic moves based on the whole picture. Your trading decisions should also be based on sound logic. The difference is that when you are trading, you don’t have to beat anyone. You just need to make consistent profits and small losses by not exposing yourself to an unacceptable amount of risk.
So even though the markets may give you the impression that the worst may be behind us, don’t forget the magnitude of the financial meltdown. Look at the big picture, because the rally could very well be one within a bear market.
Jayanthi Gopalakrishnan, Editor