Look at the big picture
For beginners, one of the most enjoyable experiences of trading is when profit is being made from the market.
However, one of the most difficult challenges for novices to endure are losses and drawdowns.
With trading and investing, there is always a risk of losing money.
That is the nature of the markets which is a zero-sum game.
Someone has to lose money in order for someone else to make money.
Generally, the new or uneducated will be the beneficiary of continuous losses while the educated, experienced and longer-term trader will have more of a chance of banking profits.
We do not look to trade trends that are likely to fizzle out after a few days - as the volatility levels during those times are unnecessarily high (as are the risks) and rewards are low.
As intermediate growth traders, we look for trends that might last months to years.
It does not necessarily mean we are in those trends throughout that whole period but we have the ability to trade during those good trending periods.
Some factors that help us find these trends are:
Fundamentals.
Breakouts from low volume bases.
Breakouts with high volume.
Declining volatility.
Linearity.
Alignments on averages.
Fresh new 52-week highs and all-time highs.
Outperforming stocks to the index, sector and peers.
On average, over the last 100 years, the stock market has provided a return of about 10% a year.
And, on average, about one in three to four years is a down year.
The chart above is the yearly view of the S&P 500.
Excluding the current bar (in yellow), there have been 30 bars that were red and 94 bars that were green.
In other words, of the 94 years of trading, 30 of those years were bearish.
A 10% decline is acceptable in most cases as it can be considered a breather before a continuation - so if we use that as a baseline, and dig deeper into those 30 bearish bars, 9 of the 30 bearish bars had less than a 10% decline from a prior positive year.
That means, of the 30 bearish years, only 21 years had a decline of more than 10%.
In other words, only 22% of bars were significantly bearish bars in the last 94 years.
The natural progression of the stock market is to move up and this will happen long term.
During that time there will be volatility, consolidation and bearish periods.
Accept that this is part of the market personality and treat it appropriately.
Bullish market - long or stand aside
Consolidation - stand aside / buy at the reversal point
Bearish market - short or stand aside
High volatility - stand aside
Low volatility - trade the trends
As some of you know, we had long-term investments that originated shortly after the financial crash of 2008 and continued until 2020 when we went entirely into cash and then started to invest once again from April 7 2020.
I hope the article above gives you an understanding as to why.
It is logical to focus on the big picture, trade the longer-term trends and allow these trends to unfold - while accommodating for short-term swings in the market.
Trying to time the market by selling a position before the pullback and buying at the low of that pullback is not one that consistently works well.
Remember, no one should try to outsmart the market because they will inevitably lose.
Instead, a better method is to sell part of a position when the price is beginning to show signs of a pullback (reversal zone, indecision candle exhaustion gap) so some profit is taken - but some investment remains so any continuation of the trend will never be missed.
Let's go trade!
