The current state can last longer than any of us can guess. Remember “shorts can go higher longer than what you can hold them”. Now, the opposite force is contributing to higher prices.
I truly believe that nobody can predict turning points with certainty in the market. This principle have helped me when I get into trouble. I look at the mirror and I am the one I call for guidance. It is in current stages where behavioral finance is crucial.
Furthermore, in the long run, the trading business, allow me to call it, speculation, rewards risk adjusted returns. When I started in 1999, simple math helped me to realize that it is on little help to make 50% in a few months when I was willing to lose 50% in the next year. Because in the next decades you can lose 50% of a much larger cake. The key is to make in the up without creating a nightmare in the way down.
Of course, this is not an easy task to repeat cycle after cycle. Last night I was talking to a friend that wanted to better understand why the market was not trading lower. He has been trading for less than 2 years and he is willing to risk 1/2 of the account.
I shared to him some basic rules that I think can help us all from time to time.
- Exactly know how much you are willing to lose in each market stage. Develop a plan and an execution strategy to follow when your worse nightmare turns to be true is mandatory. You need to be certain that you will not lose more than what you are willing to lose.
- Nobody knows, we are all doing our best guess. On the other hand, when many or those “best guess” are aligned it can fell like you know what is going on. My truth is that I am only one minuscule part of that group of “best guess” for that particular market move.
- If you think that somebody knows, perhaps it does not matter that much because they are not managing my money, they can not trade in my behalf.
- Understand that the last person in line is likely to know the least of what this queue is about. I get ready when I read euphoria in key charts.
- Make sure you are not the last one in line, most likely the last one will pay the higher bill. Following the first bullet will make sure you just pay what you were willing to pay when you joined. This is the most important task.
Here in Spanish:
- Primero lo de siempre, saber que % que estas dispuesto a perder y tener un plan muy claro si eso llega a pasar.
- Segundo que no sabemos nada.
- Tercero que nadie sabe nada y si piensan que saben no importa tanto ya que no es mi dinero.
- Cuarto, saber que el último que se suma a la fiesta la paga.
- Quinto, saber que para asegurarte que no pagas la fiesta tienes que tener el punto 1 muy claro.