Opening Position
March 2011
In the early months of a new year, it’s not unusual to hear analysts and pundits talk about how they think the economy will fare during the course of that year. I usually don’t take any of them seriously, but when someone makes a statement giving a precise figure of how much a specific market will grow, I often wonder how they managed to come up with that number. For example, if an analyst on TV says he or she believes the housing market will still drop another 5% before going back up, I have to pull up a chart of housing prices to see how that percentage was derived. As far as I can see, prices are still pointing down, which to me means that prices are still going to fall. How much? I don’t know. And there’s no way to know until you see a change in that price movement.
The same goes for analyzing the financial markets. If the market is pointing down, you’re not going to open any long positions. And if you see a market moving sideways, you can make several short-term trades with smaller profits. But when you see prices starting to break out of that sideways movement, you’ll want to jump on board and enjoy the ride. Even when you see a breakout occur on your charts, you may still hesitate to jump in because you don’t know if the breakout will sustain or if you’ll be stopped out. That’s the risk you have to take when you are trading, and you have to figure out how you can incorporate that risk into your trading plan.
As Ken Calhoun says in the Stocks & Commodities interview of the month, you have to be slow to get in but quick to get out. You will get an idea of how much time you need to commit to the markets if you really want to understand their behavior. But even if you understand the markets, you have to have the patience to wait for that right setup to appear on your charts before you hit that enter button. That price setup will have to be one where you expect your returns to be greater than the risk you take. Stephen Massel’s article, “What Can You Expect, Mathematically?”, will help you come up with an objective method to determine what you can expect from your trading system.
The tools with which to do your analysis are readily available. Do the research and come up with your own decisions. You don’t have to base your decisions on someone else’s opinions.
Jayanthi Gopalakrishnan, Editor