Saturday, July 21, 2007

Buying Opportunity or Selling Opportunity

When is a pullback a buying opportunity and when is a rally a selling opportunity? I've got news for you, as long as you live every pullback is going to look like a sell signal at the time and every rally is going to look like a buy signal. That's just the way human nature works. We require positive feedback and we are very short term oriented. Look at the first chart. The market is obviously topped out and heading down right? Well look at the second chart for your answer. This decline was a buying opportunity. Now look at the 3rd chart. The bottom is in and the market is moving on to new highs. Well not so fast look what followed. This is a case of the rally being a selling opportunity. So how do we know when a decline is a buy and a rally is a sell. TA is not much better than flipping a coin IMO. For me the COT tells me whether the big money is buying or selling. If they are buying then I want to buy the dips and if they are selling I want to short the rallies. The COT has produced much, much better results over the last 20+ years than TA alone.

How many of us started out investing and were soon churning our accounts and gradually giving all our hard earned cash to the pros or to the brokerage firms in the form of commissions? I'm going to guess a very large percentage. Granted there are some who manage to survive the learning process and can be profitable short term trading even after you factor in heavy yearly fees. Sadly most of us won't. Quite a few will just continue to day trade to satisfy their desire for excitement. All the while refusing to accept the fact that their trading habits are costing them money. They rationalize that they will soon get in a groove and make it all back. I've got news for you until you change something don't expect any different results. Let me point out the cold hard facts. If you are stuck in this vicious circle you are in fact not investing you are gambling. On top of that you are gambling against people that are much smarter, better capitalized and more disciplined than you. Basically you are easy pickins for them. The only way you are going to beat these people is to use a system that gives you an edge in the market and then have the discipline to stick with it. Otherwise these sharks are going to eventually get all of your money. At some point you have to decide whether it is more important to be excited or whether it is more important to make money, hopefully before you've lost all your capital.