Saturday, August 29, 2009

Trading climate: new or same old?

Reading a lot of "market is not a place for a reasonable investing/trading anymore" comments, I thought I'd chime in and offer my point of view.

To see where I am coming from, consider that I:
- have been trading every day (aside of vacations) for the last 13 years (2 months shy as of this moment),
- made every trading mistake known to humanity and couple I invented all on my own,
- recovered from them after 2 years of learning curve and trade for a living ever since,
- conversed with hundreds if not thousands of traders of all thinkable backgrounds, time frames and approaches.

Here are some of things I see similar in any market, I'll list them and you see if they sound familiar.

1998 - 2000, tech boom, things go higher and higher and higher. Some are happy, making tons of money and talking about "new paradigm"... and some are not, losing their shirt on attempts to short the market, talking about how insane and irrational the run-up is, predicting demise day after day, talking about manipulation and how impossible it's become to trade. There are stocks here and there that turn into cult names, and groups of fanboys cheering them up. XYBR is louded as next MSFT, WAVX is predicted to go over 100, analysts say QCOM should go over 1000 when it trades at 700. KTEL goes from 5 to 20 and 30, and "realists" (your faithful was one of them and paid dearly for that) short it, and it proceeds to 80. Some make money trading what's right in front of them; the rest is discussing how the market should not be this way, trading their beliefs and losing money.

2001 - 2003, tech crash and consequent bear market. Trend reverses, yet permabulls continue buying every new low thinking it's just a pullback (new paradigm, remember?). Market proceeds lower and lower and lower, and seeing the magnitude of drops, a lot of people start talking about selling being overdone. Now it's a move down that is considered insanely big. Each new leg down is being blamed on, guess what... manipulation of course. "Market became impossible to trade" is being heard from every corner. Optimists average down and lose their shirt. Yesterday's darlings start disappearing altogether - simply go bankrupt, delisted etc. Some lucky names get bought out before the final crash, and its the suitors that get killed now. Quality companies lose their value at unthinkable rate - QCOM is nowhere near 700 anymore, and soon loses even 100; a lot of former highfliers go to lows some call insane (NT, JDSU anyone?). Now.... one thing seems to be the same: During all this some traders make money trading what's right in front of them; the rest is discussing how the market should not be this way, trading their beliefs and losing money.

Bull market starts in the spring of 2003. No internet crazies anymore, but hey, there is always a place for "new new paradigm". Market goes higher and higher and higher, and a lot of people say it's insane, housing is a bubble, financials are overblown... and lose their shirt trying to short them... Now, one thing seems to be the same: Some are making money... my reader, be a doll, save me some typing and insert the end of the first two paragraphs.

Housing finally bursts, crash ensues, some of yesterday's darlings go bankrupt (spectacularly I must say), bear market starts. Market proceeds lower and lower, and attempts to buy each new low become common and lead to new bursts of frustration and refrain of "insane, manipulation, impossible to trade". Some are making money... etc, I know, get's annoying.

Market puts a low in March of 2009, and starts making new highs - insane new highs, of course... you can finish this part now without me typing it all.

See some things repeating themselves over and over again? Patterns in who makes money and who doesn't? Patterns in language, in assigning the blame, in finding another scapegoat (day traders in tech boom, "frequent traders" now), in invoking all-encompassing word "manipulation" that makes some feel better but still doesn't help them make money? Patterns in going against the trend, effectively fighting the market instead of being in tune with it? Patterns in trading ones own beliefs instead of market's reality given us in prints on the tape? Patterns in thinking "if something doesn't go according to my belief, it's the market that is wrong but never I"?

See where my favorite motto of many years TRADE WHAT YOU SEE, NOT WHAT YOU THINK is coming from?

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