A financial blog on investing in stocks, commodities and the gold bull market.
Saturday, August 16, 2008
We all have our beliefs or bias as to what we think is or should happen. For the most part our beliefs are influenced by recent history. As humans we are programed by our emotions to look at the past and expect the future to look the same. Unfortunately the world doesn't actually work that way. The world is constantly changing. Always will be. Sure there will be periods of time where trends will develop. They may last for long periods of time. What I can guarantee you is that change is inevitable. Nothing lasts forever. Markets don't go straight up or straight down.
The simple fact is that change is going to happen and it's probably the single most dangerous concept that investors tend to ignore. (Well beside position sizing) Once we get locked into a belief and especially once we put money behind that belief it becomes very tough for us to break that bias. We start to rationalize why we are right even if change is blatantly obvious.
Take a look at the three charts and you tell me if something has changed.
If there is anything that has amazed me over the last year that I've been writing this blog it's how strong investor biases can be. During the first part of 07 I was bullish. The only readers of the blog were bullish investors and of course the occasional bear telling me all the reasons why I was wrong. Of course the one reason that was telling me that I was right was that I was making money. The bears could not fall back on that rational. Once I recognized the start of the bear market readers and subscribers spiked. Obviously there were a lot of investors out there who were bearish.
Like any normal human we like to see confirmation that our view is correct. If someone else has your same view then it reinforces your belief that you are on the right side of the market. All of a sudden I was reinforcing the bearish belief. Viola, a whole new set of readers.
Now when you think about it this is ridiculous behaviour. Since no one can actually see the future none of us really has any idea of what's in store for tomorrow. Searching for someone to validate your position is really quite stupid. That being said we still all do it. I'm just as guilty as the next person.
Now I've turned bearish on commodities I expect that I will lose a segment of my readers and subscribers as I'm no longer reinforcing the bullish case. I've already seen quite a few oil bulls drop off the subscriber list. It was obvious that these investors were interested in getting confirmation of their bias. Once I didn't give it to them anymore they decided to look elsewhere. It didn't matter that I was correct and could have saved them losses by getting them out of oil when it became apparent that something was changing. They were unable to break their bias.
I suspect I will now lose readers who continue to hold on to the bullish case for gold. Again it doesn't matter that I've been warning for several weeks that the bells and whistles were going off in the precious metals sector. It doesn't matter that I was right and if one had been able to set aside their bias for a minute and look at what was unfolding they could have saved themselves losses. None of that matters really. What we want is confirmation that we are right and that it's OK to continue to lose money because the market is going to turn and go our way soon.
I strongly suggest that we try to think outside the box and not let our beliefs control our actions especially if the market is telling you something different. Remember you can argue with the market all you want but you will never win that argument.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.