Wednesday, July 15, 2009

Markets We Love to Hate

The market has a knack for teaching valuable lessons to those willing to listen. Then it perpetually, and oft times painfully, reminds you lest you get too lackadaisical or complacent. Rather than getting emotional and subjective when the market moves adversely, try to be objective and find out ways you can improve. Here's a few lessons I've been reminded of in the past few days.

1. Don't press your shorts too hard after the market has fallen into oversold territory.
The time to get aggressive in entering bearish positions is after a market rally, not following a selloff. Those bears who got a bit too greedy in loading the boat four or five days ago have gotten their heads handed to them during this rally. Furthermore, they then become so caught up in licking their wounds that they're too gun shy to jump back in when the rally has exhausted itself and the market is ready to roll over again. It certainly takes some guts to add bearish positions when you're existing ones have been poleaxed.

2. Don't get discouraged if you lose when the market occasionally travels the path of most resistance. Remember trading is about probability, not prediction. When placing directional trades I'm continually trying to forecast the path of least resistance for the overall market. Assuming I can do this, I should find myself on the right side of the market the majority of the time. It is the market movements that go against the grain, those that take the past of most resistance that often hurt the most. For example, I would guess that last week most traders would have bet the market wouldn't have retraced 100% of it's drop from 930 to 875 (myself included). Well.. it just did, much to the chagrin of the bears.

3. There's nothing wrong with being; there is something wrong with staying wrong! If you found yourself on the wrong side of a lot of this week's market movements, survey how much you lost on your trades. Did you lose more than you planned on losing? Was it a large % of your portfolio or a small %? Money management isn't a very sexy subject and doesn't receive a lot of time in the spotlight, however it is probably the most important factor to successful trading. To become a successful trader you have to last. To last you must protect your trading capital and that requires an unwavering discipline in adhering to your exit plan and only losing a small % of your portfolio in any one losing trade.

JPMorgan Chase (JPM) has earnings tomorrow morning followed up by IBM and Google (GOOG) in the evening. I didn't really look at JPM too closely, but it doesn't look like there was much of a volatility edge heading into earnings. I'll take a look at IBM and GOOG in tomorrow's post.


Anonymous said...

Thanks for the post was tough...more so on outlook and attitude then portfolio, but its always good to have a reminder to keep things in perspective.


Tyler Craig said...

Your welcome Ben. Thanks for stopping by.


Charley240 said...

Hi Tyler,

What is your take on BAC before they post earings?


Tyler Craig said...


Sorry for the delayed response. I've been quite busy and I didn't realize BAC reported earnings this morning. In hindsight, options weren't really trading at much of a premium compared to recent realized vol. Meaning that the options didn't seem to be a slam dunk sell pre-earnings. Currently BAC IV is at 63% and so is 30 day HV. So I probably wouldn't have played it myself. I also don't tend to play with cheaper stocks much.