Trading Educators Blog
It is Tuesday, and you've been watching the markets closely for the past two weeks. It appears to be the fulfillment of your dreams: prices are making new market highs. You wonder, "What is the smart thing to do?" On the one hand, you can go long, but will this optimism last? Oil prices are still high, but they are lower and a little more stable compared to last summer. Everyone is hoping that companies will show strong earnings this quarter, but will they? Are the record highs just temporary? On Wednesday, the masses were worried about interest rates and the markets across the board closed down. Perhaps, cautious optimism may be warranted. Many traders and investors prefer a bullish market, but smart traders are cautiously optimistic these days. When trading the markets, you can't count on a sure thing. It can be up for several days and down the next. No one knows with 100% certainty what will happen next.
There is no replacement for doing your homework. The more you know about the markets and the companies you trade, the greater your odds of winning. Which companies will have earnings that match analysts' forecasts, and more important, will it matter? As any astute market observer knows, a stock may rise before an earnings announcement, if the masses are optimistic, but should the earnings report fail to match expectations, the price will decline even though the company may have done rather well. It's all a matter of the opinion of the buyers and sellers.
What will the masses do? That's the big question. Right now, there is international turmoil and a belief that we may not experience the economic growth to which we have been accustomed. And when that happens, the masses may turn to pessimism. What can you do to profit?
To a great extent, it depends on your personality. If you are a risk taker, you can capitalize on the times. You can trade on the likely probability that the masses will sell markets that fail to meet analyst expectations, feel seller's regret, and buy back what they sold out of impulsive fear. You can buy at the low point and sell it back to them when seller's regret sets in. One warning, however, it sounds easier than it is. But as a strategy, it works. Whether you try it depends on your personal psychology. If you don't mind the risk and uncertainty, it will work for you. If you are a cautious, however, then this may be a time to stand aside. Cautious stock and option traders stay away from trading right before earnings reports. You never know what will happen until it happens. The cautious trader may not want to risk money when analyst forecasts and earnings reports have the most power to dictate how the masses will behave. The masses react to news, reports, and speeches, and unless you have a crystal ball, you cannot know how the market will react. They can rise or fall on good news, and vice-versa on bad news.
In the end, even during times of optimism, it is wise to stick to the basics. Manage risk by risking only a small amount of capital on a single trade. Think in terms of the big picture and realize that what matters most is your performance across a series of trades. And work hard. Study the markets. Make an educated guess as to what the masses will do, and outline detailed trading plans. And most important, trade your plan. Sticking to the basics may not allow you to make huge profits on a few key winning positions, but on the other hand, it will keep you in the game should the markets turn against you. And in all likelihood, when you stick to the basics, you will end up taking home huge profits overall.