Monday, February 17, 2014

As Old as the Hills

"Another lesson I learned early is that there is nothing new in Wall Street.  There can't be because speculation is as old as the hills." - Jesse Livermore 

The market is filled with patterns.  Most of them I don't even know, and will never know.  But you don't need to know much in order to make money trading.

When I began, I didn't even consider myself a trader.  I considered myself an investor, someone looking to buy stocks for the long term.  Like many beginners, I started in stocks, and believed in the myth that investing in the stock market was the road to riches.  So I just bought some small cap stocks, and waited for them to go up.

I read magazines like Fortune and Kiplinger's to get advice about stocks.  I believed in the words of the writers and fund managers like it was Bible.  I looked at price/book, price/earnings ratios, and revenue growth.  I tried to find value.  Instead, I lost my ass.

The turning point came when after a year of investing, I was down 50%, felt like crap, and I threw everything I read out the window.  It wasn't working.

There had to be another way.  I observed what was going on, it wasn't random, but I had to look in the right places.  I tried to absorb the action.   I watched the market everyday. I stopped investing.  I wanted to make my money back quickly.  So I focused on shorter time frames.   Began to notice some patterns in actively traded stocks: daytrader favorites, stocks up a lot or down a lot.  These active stocks had certain tendencies.  Things like gapping up, flush out bottoms on heavy volume, volume spin after a strong uptrend leading to a reversal.  I backed my observations with money.  These were new methods, an experiment with real money.  I never did paper trading, because I am an action junkie, paper trading didn't interest me.

I started being right more often than wrong, and made some money.  It wasn't a smooth ride, as I was addicted to the action, and often traded too aggressively, resulting in a few blows up along the journey.

I learned some important lessons.  I realized trading is not about analyzing a company's financials, finding value, figuring out what the economy will do, or being good at interpreting the news.  It is not about being good at technical analysis or charting.  I don't know anybody who makes money from looking at charts.

I learned to recognize patterns and find trading opportunities where you can be right more often than wrong.  And patterns repeat because traders and investors have biases.  Like wanting to go to cash before a big report.  Wanting to be long instead of short.  And feeling fear more strongly than greed.  I learned from my mistakes last July, shorting a market that bottomed, going up every day, thinking it has gone too far, too fast, fighting it on the way up.  It was a costly lesson, and I did not repeat that mistake again, like I could have last October, or last week.


Anonymous said...

Thanks for the sharing!

Regarding the market, do you see any potential that we may just go down from here since everybody is looking for the new high?



Market Owl said...

No, I don't. When you make a bottom like we did in early February, it shows underlying strength, and you cannot ignore the huge uptrend that we are in. Usually huge uptrends don't turn on a dime, it takes a lot of choppy sideways movement before you get the big down move.