Are you trying to Predict the Market's Direction?

Timing of the Shrewd

As a trader it is not really necessary to be able to predict market direction; just trading what you see (not what you think) is a good rule. As far as what happens next I aint got a clue, but then nor has anybody. the markets do what they want. All we can do is be prepared for our methodology.

In the past I have on many occasions read a well reasoned page-long article giving the most convincing, totally plausible and logical argument as to why the market is likely to fall. Had I stopped there I might have acted on it. But I turn the page and find an equally well reasoned logical explanation of why the market is likely to rise. They cancel each other out. Both totally believable.

I have since come to realize that this situation - of totally plausible cases for totally opposite scenarios, is the norm. On (literally) any day of the week, I can find a totally plausible bull case and a totally plausible bear case, from totally credible respected authors - in some cases both very successful fund managers. I will sometimes make a casual mental note of who is saying what. But I no longer sit down and study the logic that respected authors are using - because there really is no point.


There is a famous Morecambe & Wise sketch in which Eric is playing piano appallingly, and guest Andre Previn informs him 'You're playing all the wrong notes.' To which Eric responds 'I, beg, your, pardon! I'm playing all the right notes...just not necessarily in the right order.' In my experience you can take all the worthy views on market direction, and by shuffling them can make them tally with how the market pans out. But unshuffled, they are pretty randomly half wrong and half right - and I don't regard it as a good use of my time to sit down and read them.

Don't spend time seeking certainty, or even near certainty. Just regard the market as part of nature, and develop an approach that accommodates whatever it does. There are too many variables for any assessor to take enough of the right ones into account at any particular time ;o)

A lot of people are trying to guess - whoops, sorry, I mean 'analyse' - which way the market is going to go next. Frankly, no-one really has a clue. If they did, they'd be a squillionaire living on their own desert island, not bothering to waste time coming out with forecasts for everyone else.

Obviously, it's very interesting to speculate on these matters. But my experience is that one can lose out very heavily by taking a rigid and unalterable view of market trends.

October 1998 and March 2003 are just a couple of examples of times when I started going heavily long, in the face of advice of many "experts" who solemnly intoned that the market was merely in DCB mode and that on no account should anyone buy anything "cos this market's tanking big time!"

I didn't know for certain, of course, that they were wrong. It's just that most of the shares on my watchlist were going up, along with all the indices. So I bought loads of 'em, armed with my policy that if indeed this was a DCB situation and everything started heading south, I would cut and run.

But the nice thing about those times is that prices often rise so fast that it can be a very, very profitable time indeed. Standing back and saying ;well, lots of people say the market's going to go down, so I'm staying out' would have deprived me of some very worthwhile gains.

I also think that unless you have been through a crash you can't really see these type of markets in terms of crash waiting to happen. A crash will happen when the market is already in downtrend. And this time? Well, of course, maybe everything will go down again next week - in which case I'll cut my losses quickly. (That would be a bit like earlier last week when I opened quite a few positions, only to close them at an overall loss of a few hundred quid over the following day or two.) Friday was such a good day for the markets that, even though I opened 15 new positions, I was only down by a double-digit figure for that day. But if - and I think it is not impossible - the recovery continues for a little while longer, I may do quite nicely. That doesn't on the whole seem like a bad risk/reward balance to me!

An investor is different to a trader. I have a long-term-investor friend whose sole criterion is to stay onboard stocks which stay above their 200sma (as viewed on Sharescope, a charting application), and quit when they drop below it. He doesn't like trading in and out too frequently, so tends to pick stocks that have a history of staying above for months at a time (like DTY, which has done so regardless of market turmoil for over 2 years) and avoids those which don't (like TSCO). He buys in on a simple 50/200sma golden cross and sells on share price falling through the sma200 (i.e. doesn't wait for the 50/200 dead cross). He cops a few short term reversals but has been doing it for about 7 years and is perfectly content with it. He takes no part in bulletin boards and doesn't follow company or market news - just end-of-day sharescope and nothing else.

He typically has a 'squad' of around 30 stocks (including I believe CDI, DTY, BEE, BTEM, AXO, AAS) from which he selects his current 'team'. Sometimes he finds himself holding none at all for a while, sometimes a dozen or more.

One final observation. In my experience, traders who spend a lot more time analysing their individual stock selections - whether potential or actual open positions - and a lot less time worrying about the future direction of the market as a whole, tend to make a lot more money. Yes, I am guilty of over-obsessing about market trends too. But at least I am flexible enough to override that obsession if large numbers of individual stocks in which I am interested are going strongly in the right direction.

And, no, I've no idea what will happen on the markets next week, but - let's get real here - nor does anyone else ;-)

Dedicated to all those who have remained in cash over the last few months...with apologies to the Scissor Sisters:

Wake up in the morning with a cash pile like 'what ya done?'
This used to be the life but I don't need another one
Good luck chartin' everythin', carrying on, you wear them gowns
So how come I feel so lonely when FTSE's rising and I'm callin' the market 

So I play along when I see that FTSE chart
I'm gonna be the one who gets it right
You better know when you're swing tradin' round the dealing room
Looks like the money's solely yours tonight

But I don't feel like tradin'
When the old Dow Jones raises
My chart could take a chance
But my fundamentals can't find a way
You think that I could muster up a little soft, shoop devil trade
But I don't feel like tradin'
No sir, no tradin' today

Don't feel like tradin', tradin'
Even if I find nothin' better to do
Don't feel like tradin', tradin'
Why'd your stocks break out when I'm not in the mood?
Don't feel like tradin', tradin'
Rather be home analysing market trends when I can't get down with you

Markets come and markets go just like the old empires
When all you do is trade your stocks and call that versatile
You got so many stocks make a blind man so confused
Then why can't I keep up when money's the only thing I lose?

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