Category Archives for "Free CMU"

CMU: How to Trade Emotional Markets

By Jani Ziedins | Free CMU

Cracked.Market University

CMU: How to Trade Emotional Markets

Traders finally decided the Coronavirus matters and the S&P 500 tumbled 8% from last week’s record close. So much for the calm and complacency that ruled since the October lows. While bears finally get to gloat over being “right”, stocks are still at levels that were all-time highs only a handful of weeks ago. Sure, prices are a lot lower than they were last week, but they are still well above levels when most bears started claiming they were too high.

I don’t mean to single out Bears because Bulls are equally prone to the same ridiculousness. Both sides get hung up on their outlook and spend far too much time justifying why they are right instead of trying to understand why they are wrong. The key to trading successfully is moving past that useless dogma and just be an opportunist. I don’t care if the market is going up or down. It makes no difference to me as long as I’m making money.

During emotion-filled periods like this, my views are definitely in the minority as people spend way too much time explaining why this selloff is either unjustified or just getting started. I have no idea what comes next and no one else does either. Emotional selloffs are the hardest things to predict because they always go “too far” and there is no way to know how far is “too far”. And just when it seems like the sky is about to fall and all hope is lost, the selling capitulates and prices snapback from oversold levels with a vengeance.

I have no idea what this market will do next, but I do know it will go “too far” in one direction and then it will go “too far” in the other direction. Armed with nothing more than that most basic outlook, we can create a fairly sensible trading plan.

If we know a big move is coming, all we need to do is jump on the next move that comes along and see where it takes us. Prices bounced this morning. Great, buy the dip, start small, get in there early, keep a stop near your entry, and only add more money after the trade starts working. If we’re wrong, prices slip under our stop, we take a small loss, and we try again next time. Maybe that is another rebound attempt. Maybe stocks tumble under the lows and we flip to shorting the weakness using the same sensible approach.

It makes no difference to me what the market does next as long as it does something. If you leave your bullish or bearish biases at the door, you can make money too.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Bulls or Bears, who’s right?

By Jani Ziedins | Free CMU

Cracked.Market University

Q: Bulls or Bears, who’s right?

A: Neither

By definition, bulls and bears are married to their positions and will justify them no matter what the market does. When they are right, they gloat. When they are wrong, they argue even harder. Neither approach results in successful trading and if your goal is to make money, you should never fall into this trap.

Successful traders are pragmatic. Three weeks ago, I liked the way the market was setting up and I bought the first Coronavirus dip. That trade turned out brilliantly, rallying nearly 200-points over a couple of weeks. But rather than gloat over my defeated rivals, I recognized good enough when I saw it, collected my worthwhile profits, and started looking for the next trade. That led to my next trade, which, unfortunately, didn’t work out so well. But since I was smart about my initial position size, entry, and stops, Monday’s dip didn’t hurt as much as it could have if I was stubbornly attached to my outlook.

What happens next is where it pays to be pragmatic. Rather than dig in my heels and argue this selloff was unjustified, I recognized the market’s emotional state and knew a great trade was going to explode in one direction or the other. Sometimes these things bounce hard and fast. Other times they keep going. As an opportunist, it made no difference to me which way the market went as long as I was making money.

Yesterday afternoon, I bought the dip when the selling stalled. I started with a small position and a tight stop. Everything was progressing nicely this morning when the market opened modestly higher. But rather than keep going, the rebound stalled and selling resumed. Rather than fight it, I flipped sides. When my stop was triggered, I got out. When the market fell under Monday’s lows, I went short. Bull or bear, it makes no difference to me as long as I’m on the right side of the trade.

And now that we find ourselves on the other end of the spectrum, down 7% from recent highs. Should shorts be gloating? Of course not! There are too many profits at risk to get caught up in this battle over who is right and wrong. Rather than brag about our success, we should be looking for opportunities to lock-in profits. Counter-trend trades bounce hard and fast, meaning anyone waiting for more will soon be left with none. Shorts should recognize their good fortune, look for opportunities to lock-in profits over the next couple of days, and start looking for the next trade. Once this thing gets oversold, it will snap back with a vengeance. Either we profit from the next bounce or we watch all of our profits disappear. You decide.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Making money with TSLA vs the S&P 500

By Jani Ziedins | Free CMU

Cracked.Market University

Alternate title: Why I swing trade the indexes

It is hard to ignore what is going on in TSLA with the stock up 43% this month alone! While it definitely feels like this shocking move left a lot of us behind, should we actually feel bad about missing it?

There are a lot of reasons why I settled on swing-trading the indexes using leveraged ETFs. One of these days I will write more about the fundamental reasons I like this trade. But for today, let’s focus strictly on performance. How does swing-trading the indexes using leveraged ETFs compare to holding a basket of the hottest stocks, including the record setting TSLA?

First, I am only comparing owning the underlying stocks since that is what sane people do. While there are plenty of internet stories of people turning $1,000 of far out of the money calls into a million bucks on TSLA, that is nothing more than gambling with lottery tickets. People who approach the market with such a total disregard for risk management go broke within a year. (There are responsible ways to structure Black Swan trades, but I doubt any of the people making headlines were doing it responsibly.)

Also in the name of risk management, let’s assume any sane person holds a basket of highflying stocks since putting all of their money into a single stock is also reckless. But not to give anything away, this hypothetical person is extremely aggressive and his entire portfolio is concentrated in this market’s hottest trades.

For the sake of argument, let’s say he holds five popular growth stocks: TSLA, NFLX, AMZN, FB, and let’s throw an IPO in there for fun, PTON.

How does this basket of stocks compare to UPRO, the 3x leveraged S&P 500 ETF, since the start of the month?

TSLA: +43% Outstanding!
NFLX: +12% Great!
AMZN: +8% Solid!
FB: +7% Good!
PTON: -17% Can’t win them all.

Average: 12%  For only a few weeks of work, that is a fantastic return!

Now for the boring index fund:

UPRO: +16%

Yup, you read that correctly. A borning index ETF outperformed a basket of the hottest stocks, including the nearly unpreceded surge in TSLA. Do I feel bad about missing TSLA? Nope, not in the least.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN $TSLA

CMU: The easiest thing you can do to improve your trading right now

By Jani Ziedins | Free CMU

Cracked.Market University

We come to the market with different experience levels, expectations, and needs. But the one thing all of us have in common is the desire to improve our trading. It doesn’t matter if we are struggling or already pretty good at this, everyone wants to be even more successful than they are now.

The quickest and simplest way to improve our trading is to adjust the way we approach the market. Rather than torment yourself and overthink every decision, ask yourself, “What would a savvy trader do here?”

All too often we fall prey to our impulses and emotions. We love the feeling of a winning trade and don’t want to give up on it. But often that means holding too long and watching those profits evaporate. Or we enter into an online argument that makes us even more stubborn and reluctant to admit our mistake. Or we ignore a loss because regret keeps us hoping the rebound is just around the corner.

All of those common mistakes would have been avoided if a person pictured themself as a savvy trader and then made the same decisions a savvy trader would make.

Does a savvy trader brag about his winnings?

Does a savvy trader lock-in worthwhile profits or does he try to squeeze out every last dime?

Does a savvy trader check overnight futures at 3 am because he is worried about his positions?

Does a savvy trader hold losing positions, hoping they will come back?

Does a savvy trader chase the crowd or does he lead the crowd?

Does a savvy trader stay calm and rational no matter what is going on around him?

Does a savvy trader allow a poor trade to affect his mood outside of the market?

Does a savvy trader get discouraged following a loss or does he realize losses are inevitable and calmly move on to the next opportunity?

If you look back at all of your biggest losses, chances are you didn’t do what a savvy trader would have done in that situation. This simple exercise could have saved you a lot of money and heartache. While you cannot do anything about your previous mistakes, it is never too late to use this technique to improve all of your future trading decisions.

None of us are perfect, but it helps us if we aspire to be that perfect trader. Every time you find yourself faced with an important trading decision, ask yourself “What would a savvy trader do here?” Chances are, that is the move you should make.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $STUDY

CMU: Is the market rigged?

By Jani Ziedins | Free CMU

Cracked.Market University

Spend any time with retail investors and it is almost guaranteed you will hear someone will complain, “the market is fixed.” This is one of the public’s most persuasive myths about the stock market. These people are convinced there is an evil puppet master rigging the system against hem.

My question to these cynics is always, “If you know the market is fixed, why would you do something so stupid as trading against it?” If they know for a fact big money is going to buy every dip, why would they do anything other than buying every dip? Don’t complain, take these valuable insights and profit from them! Complaining about it makes no sense.

In all honesty, I wish the market was fixed. That would make this so much easier. If there was a puppet master pulling the strings, all I need to do is figure out what his intentions are and follow along. Pilot fish swim behind sharks and live off the scraps. I’d be thrilled making a living as a pilot fish following the market manipulators and profiting from their leftovers. Unfortunately, there are no sharks controlling the market for me to team up with.

People think big institutions, high-frequency traders, hedge funds, and even the Fed is conspiring to ruin their trades. But if you spend any time reading the financial press, it doesn’t take long to realize these big institutions and hedge funds struggle with unprofitable trades just as much as we do. If these big players were rigging the system against us, don’t you think they would be making a ton of money? The brutal truth is 75% of professional money managers fail to even keep up with the dumb indexes every year. If these big players are manipulating the market, they sure don’t do a very good of profiting from it.

To be perfectly frank, what people really mean when they claim the market is fixed is, “I lost money and I refuse to take responsibility for my poor trading decisions”. Don’t be that guy! Take responsibility for your bad trades. Own up to them. Learn from them. And most importantly, don’t blame them on anyone else.

Just because your trade didn’t work doesn’t mean someone is out to get you. It simply means you didn’t understand all the factors at play. Learn from those mistakes and do better next time. Victims blame other people, don’t learn from their mistakes, and never succeed in this business. Don’t fall into that mindset.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

CMU: Always have a plan to take profits, TSLA edition

By Jani Ziedins | Free CMU

Cracked.Market University

As I wrote Monday, I like mixing the topic of these posts up a bit more but it is hard to ignore what is going on with TSLA. Not very often do we have the opportunity to witness one of these things blowing up in real-time and be able to dissect it as it happens.

In case you are living under a rock, TSLA had the biggest two-day run in the stock’s history earlier this week, at one point surging nearly 50% from Friday’s close. But as expected, that rate of gains was not sustainable. And not only did the rate slowdown but now it appears like the bubble burst. Wednesday the stock crashed, giving up the majority of those gains in a single session. Thursday’s rebound attempt was valiant but ultimately unsuccessful.

The reason I’m writing this post is because when trading, it is essential we always have a plan to take profits. If someone was fortunate enough to be in TSLA on the way up, great for you. But if you don’t act, it will all be for naught. If we are in this to make money, the only way we do that is by selling our biggest winners.

All too often people get caught up in the moment and start believing the hype. They know something other people don’t. That history doesn’t apply to this particular situation. While part of them deep down knows they should be taking profits, they are so afraid of missing out they cannot bring themselves to do what needs to be done.

Unfortunately for most of the people involved in TSLA’s staggering move this week, everyone who rode it all the way up is now riding it all the way down. As unbelievable as this sounds, at one point Thursday nearly everyone who bought TSLA shares in the best week of the stock’s entire history was sitting on fairly sizable losses. As my dad always liked to remind me after screwing up, easy come easy go.

And I wish I could say the worst was over. Unfortunately these things are even more spectacular on the way down. The market likes symmetry and the fall will be just as jawdropping as the rise. Expect this to go far beyond what anyone thinks possible. Just ask Bitcoin bulls how bad it got after that cryptocurrency fell from its parabolic highs. While I don’t expect the same magnitude of collapse here because Tesla is a real company with real value behind the stock, it will get shockingly ugly before this episode is over.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $TSLA

CMU: Lesson 2: Trade proactively, not reactively

By Jani Ziedins | Free CMU

Cracked.Market University

This post continues the series expanding on of my 23 Trading Rules.

Lesson 2: Trade proactively, not reactively.

That sounds easy enough but the truth is very few people actually trade this way. Our natural instinct is to follow the crowd. We can blame this tendency on our ancestors. When everyone else was running away screaming, the guy who stuck around to see what all the fuss was about quickly turned into lion food. Those that ran instinctively alongside the crowd lived longer and passed their genes along to the next generation.

While those survival instincts worked great on the African savanna, they are not helpful in the financial markets. In fact, this misplaced gut reaction is the single biggest factor contributing to why so many people wash out of the market every year. These unfortunate traders didn’t survive long enough to learn how to control their natural impulses and they ended up falling victim to the market’s cruel tricks.

No doubt I’m preaching to the choir because anyone with even the smallest amount of trading experience knows what I’m talking about. We’ve all been guilty of it at some point. And if you claim it never happened to you, either you are a liar or your brain is miswired!

Running when everyone else is running is reacting to what the crowd is doing. So is getting nervous and scared and when everyone else is nervous and scared. Other times the crowd infects us with optimism and greed. No matter what the crowd is doing, it is nearly impossible to not at least feel the tug of those same urges.

If reacting to what the crowd is doing is the wrong way to trade, what is the right way? Easy, do the opposite. Get ahead of the market by moving proactively. Rather than wait to sell until after prices tumble from unsustainable levels, bailout while everyone else is still in a good mood. Instead of panicking when everyone else is selling, recognize the value of those irrational discounts and start buying what the crowd is selling. Rather than chase prices higher, buy before it is obvious to the crowd.

While it is nearly impossible to deny our emotions, the best way to manage them is by drafting a trading plan when nothing important is going on. When the market is boring you to tears, spend that time planning what you will do when it stops being boring. What price move would convince you to buy? What would convince you to sell? When will you take profits? When will you admit defeat and pull the plug? Write those things down and commit to acting on that plan before the crowd starts pressuring you to react. That way when you feel the urge to join everyone else running away, you pull out your plan and use those premeditated decisions to overpower your natural impulses.

It’s an overused market cliche but few things are more important to long-term success than  “planing your trade and trading your plan.” Stay ahead of the crowd and you will be far better off than everyone else reacting impulsively to every bump and gyration in the road.

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Tags: CMU $SPY $STUDY

CMU: How to make money when your gut is wrong

By Jani Ziedins | Free CMU

Cracked.Market Univerity:

I will be the first to admit my gut isn’t always right about the stock market. Sometimes I overthink a situation or assume a move has more potential than it really does. Regardless, if I traded exclusively on gut feel, I would have a lot less money than I do. My secret weapon? Planning my trades and sticking to my plan. It doesn’t get any more straightforward than that.

Every time an opportunity arises in the market, look at it and ask, “what would take to get me to buy this?” Moments after answering that question, ask yourself the follow-up, “okay, if I’m in, what would it look like if I’m wrong?”. Answer those two simple questions, follow through on those commitments, and you will be miles ahead of almost everyone else who trades stocks.

Let’s look at a few recent examples where my gut was wrong but my trading plan got it right. Back in December, TSLA moved to the upper end of its trading range. While my gut is reluctant to believe TSLA is the second most valuable car company in the world, the stock was at an important inflection point. Either it hits its head on resistance like it has done so many times over the last several years. Or it smashes through resistance and keeps on going. While my gut was cynical, my trading plan said to buy $TSLA above $390 and stick with it as long as it stayed above this level. Here we are nearly two months later and the stock is up almost 50%.

Gut 0 – Plan 1

Bitcoin is another one I don’t trust. I even wrote a post last year questioning its viability after the $10k rebound tumbled back under $7k. But you know what? I was wrong. Instead of tumbling back to the lows, Bitcoin rebounded and retook $7k. My trading plan said that level was the line in the sand and no matter what my gut felt, as long as Bitcoin was above $7k, I had to give it the benefit of doubt. Here we are a few months later, up 35% and pushing up toward $10k again. While I still question the viability of Bitcoin over the long-term, it has been trading well over the short-term and there was only one way to trade it after it retook $7k.

Gut 0 – Plan 2

And lastly, this week’s Coronavirus tumble. I like taking some profits proactively and keeping a trailing stop on the remainder of my winning positions. That discipline meant I locked in profits when the S&P 500 was above 3,300 and had a lot of cash ready to buy this week’s dip. That said, I was a little nervous along with everyone else when the market gapped 1.5% lower Monday morning. Most of the time these emotional selloffs get carried away and go far further than anyone expects. My gut was hesitant to buy Monday’s early bounce because I feared another waterfall selloff, but my trading plan told me to buy the bounce and protect myself with a stop under the opening lows. While it didn’t feel good, this was my plan’s entry point and keeping a stop nearby limited my risk. It was a very good entry even if it didn’t feel good. And here we are a few days later, well above that entry point.

Gut 0 – Plan 3

No one can correctly predict the market’s every move, but if we plan our trades intelligently and stick to that plan, we will do a lot better than most.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $BTC Bitcoin $TSLA

CMU: Did you sell? Always be ready to get back in

By Jani Ziedins | Free CMU

Cracked.Market University:

There is plenty of advice on how to get out of the market. Whether that is taking profits when the market hits your price target or bailing out defensively when the market retreats to your stop-loss. But what you don’t hear very often is how important it is to get back in when you realize you sold too early.

The single greatest strength we have as independent traders is the nimbleness of our size. While institutional investors have impressive degrees, decades of experience, an army of researchers, and industry contacts we could never duplicate, what they don’t have is speed. It takes them weeks, even months to establish full positions, something we do in the amount of time it takes to make a few mouse clicks.

But with that nimbleness comes responsibility. Taking profits early and often is always a good idea. But so is continuing to watch the market for the opportunity to get back in. All too often people flip their outlook on a trade as soon as they sell. All of a sudden what was a great and profitable trade transforms into an outdated and used up idea. But a lot of times there is life still left in a good ideal and we should not let ourselves miss out on it just because we sold last week, yesterday, or even an hour ago.

Every time you sell, have a plan on what it would take to get back in. Maybe you jump back in if the market pulls back to a certain level. But what if the pullback never happens? Do you have a plan to get back in if it keeps going higher? While we never recklessly chase a move higher, maybe the stock is more resilient than we expected. But rather than missing the next leg higher because we are stubborn, have a plan to buy when prices exceed the prior highs.

There is nothing wrong with taking profits when your trading plan tells you to take profits. In fact, it would be wrong to not follow our trading plan. But once we are out, always be looking for that next entry point. It could happen a lot sooner than you expect.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

CMU: Lesson 1: Trading is hard

By Jani Ziedins | Free CMU

Cracked.Market University:

I learned many things through my three decades of trading experience, but none have been more all-encompassing than the simple idea, “Trading is hard.” If I’m only allowed to share a single idea with a new trader, this would be the one.

We arrive with different backgrounds and with varying ambitions, but the one thing that unifies all of us is the belief we can beat the market. The concept seems easy enough. Come up with an idea. Move a little money around with a few mouse clicks. And blamo, profit! Or at least that was the notion that brought us here.

But as most of us have already figured out, reality is far different. In fact, I’ve come to believe trading successfully is one of the most challenging ways to earn a living. In most fields it is pretty straight forward, the harder you work, the more successful you are. Unfortunately, there is no such correlation in the stock market. A well researched and thought out idea has nearly the same chance of being correct as a coin flip. In fact, there have been documents cases of dart-throwing monkies outperforming some of the smartest and most experienced professionals in this business. Talk about humbling!

The challenge with trading is the only thing that matters is when we open a position and when we close it. It doesn’t matter how we came up with the idea. It doesn’t even matter if we were right. The only thing that matters is if the market moved in our direction between while we held it. Sometimes we get it right and make money. (Yeah!) Other times we are wrong. (Boo!) But far and away the most frustrating cases is when our idea was spot-on but somehow we still managed to screw it up. (WTF?!?)

The truth is, trading is as much about managing ourselves as it is about having a good idea. Can we control both our positive and negative emotions? Do we have a sound risk management strategy? Do we know how to get in and get out at the most favorable times? Are we capable of admitting our mistakes?

I wish I had a simple or easy answer to help new traders getting started out, but the simple truth is trading is nowhere as easy as it seems. But don’t get discouraged. As long as you educate yourself, have a sensible plan, and stick with it, eventually this gets less hard. (It is never easy)

Over the next few months I plan on writing brief posts covering all of my Trading Rules. If you want to receive the list of my list of Trading Rules and be notified when new posts are published, signup for FREE Email Alerts.

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CMU: You have profits, now what?

By Jani Ziedins | Free CMU

Cracked.Market University:

The indexes are at record highs and anyone not obsessed with fighting this market is sitting on a pile of profits. The question now becomes, “what should we do with these profits?”

The first thing to remember is markets move in waves. Everyone knows this but people often forget this simple idea in the heat of battle. When it feels like all hope is lost and we are on the verge of a far larger crash is the exact moment prices bottom and bounce. The same goes for the upside, the moment this starts feeling is easy is right before it turns hard.

I’ve been doing this far too long to attempt picking tops. And even if I were picking a top, this probably wouldn’t be it. That said, we don’t have to pick tops in order to make decisions that protect our profits. It’s been a good run. Stocks are up more than 100 points since last week’s intraday lows. And we are nearly 20% higher than last fall’s test of 2,800 support. Could we rally another 100 points next week? Absolutely. Could we advance another 20% over the next three months? Sure. But just because we can do something doesn’t mean we will.

We can look back in history and find several instances where the market advanced 40% over 6 months. But when you consider it took 100 years to accumulate that handful of instances, just because something is possible doesn’t mean we should trade using those assumptions. While these things can and have happened, we shouldn’t expect them to happen. Instead, we should treat this market like any other market until it tells us otherwise; two-steps forward, one-step back.

There are two sensible ways of dealing with profits. First, if we are in this to make money, the only way we do that is by selling our winners. No matter how much we like a position, we cannot make money unless we sell it. The problem is selling a position means giving up on further upside and no one wants to do that. But if we remember that most people lose money in the stock market, then we probably don’t want to do what most people do. And most of the time that means selling stocks we don’t want to sell.

Now maybe it is just too hard for us to part with our favorite position. The second alternative is to take this decision out of our hands. Take a moment when everything looks good and the market is not pressuring you in any way. Look at the chart and pick a point where if the market falls to this level, you think you should get out. Write that level down and commit to selling at this price if the market dips back to it. If you are lucky and prices keep moving higher, repeat this exercise every week or two. Keep moving your stops up until that fateful day when the market finally forces you out and you collect your pile of profits.

While this seems like an either/or decision, very few things in the market are binary. Sometimes the best solution is doing a little bit of both. Take some profits proactively and follow the rest of your position higher with a trailing stop. That gives you the best of both worlds. But no matter what you decide, please decide to do something and commit to it. If you wait until the market starts dipping before making a trading decision, chances are emotions will cloud your judgment and you will be moving in lockstep with the masses that lose money.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

CMU: When to take profits

By Jani Ziedins | Free CMU

Cracked.Market University:

The only way to make money in the stock market is by taking profits in our favorite trades. This blog post covers how I lock-in profits. This is a particularly timely post, not because I think this is the time to take profits, but because of what taking profits allows me to do.

First, I don’t know how to consistently pick tops and I bet most of you don’t either. If we cannot pick the top, then by rule, we are either selling too early or we are selling too late. Both strategies are perfectly acceptable and they come with their own unique set of advantages and disadvantages.

The first and easiest to understand is selling too late. This happens when we hold a stock past the peak and sell it on the way down. We’re in this to make money and that means we naturally want to squeeze every last dime of profit out of a trade. Who wants to sell for a 10% profit only to watch the stock rally another 200%?

The most conventional way of selling late is following the stock higher with a trailing stop. When the stock rallies from $50 to $60, we move our $40 stop up to $50. If the stock moves up to $70, we lift our stop to $60. We repeat this process until the stock finally peaks and dips under our trailing stop. This seems easy enough.

(Of course, a lot of traders are not sensible and rather than employ a thoughtful system like a trailing stop, they react impulsively to every bump in the road and only sell after they become convinced their favorite stock is crashing. And as most of us know from personal experience, this happens moments before prices rebound!)

But there is another way to take profits and is the approach I prefer, selling winners on the way up. The most obvious disadvantage of selling early is once we get out, we give up on any further upside. Unfortunately, most people believe this and it is absolutely not true. Just because we sold last week, yesterday, or even this morning doesn’t mean we cannot jump back in if the conditions warrant it. But most people have the mindset that once they sell, they are out of the trade and this just isn’t true. Selling simply means the risk/reward is no longer stacked in our favor. But like everything in the market, the situation can change quickly.

There are two reasons I like selling early. First, taking profits early frees my mind to look for the next trading opportunity. Selling early leaves me hungry and forces me to start looking for something to do with my cash. Sometimes that means buying back in after a short period out of the market. Other times it allows me to be the hungry dip buyer during the next dip. Second, I don’t like holding stocks moving sideways. I’m not getting paid when a stock is consolidating, yet when I own a stock, I continue holding all of the risks of the unknown. I only want to hold risk when I’m getting paid and that means avoiding stocks moving sideways.

The reason this applies to our current market is because I took profits proactively before the holidays. The S&P 500 rallied above 3,200 in mid-December and that was good enough for me. Every other time the market hit a round level over the last few months, it traded sideways for a bit. Now, I will freely admit I missed the move a few days later to 3,250, but I wasn’t worried about it. Not long after later prices tumbled and when the crowd was fearfully debating whether they should bailout before the market crashes, I was eagerly looking at this dip as a buying opportunity. While people were abandoning ship yesterday, I was buying the dip.

Selling early gives me more flexibility and it keeps me out of the market when I don’t need to be in. I had a nice holiday out of the market and taking profits early left me in a great position to jump back in once the market presented the next opportunity.

That said, this is what works for me and it doesn’t necessarily apply to you. Find the strategy that works for you and stick to it. The only way to do this wrong is making it an emotional decision.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $STUDY

CMU: When the calendar matters and when it doesn’t

By Jani Ziedins | Free CMU

Cracked Market University: 

With 2020 only a few days away, I want to discuss the “calendar effect”. I alluded to this phenomenon in recent posts, but this is an important concept and worthy of the entire spotlight today.

In a lot of ways, the calendar doesn’t matter. For example, Year-to-Date gains/losses are a meaningless statistic, especially early in the yar. The same can be said for annual gains. 2019 will go down in history as the second-best performance of the last two decades and everyone is cheering these nearly 30% gains!

Unfortunately, 2019’s headline number isn’t so much about how good 2019 has been, but how bad 2018’s fourth quarter was. If we adjust the rolling 12-month period from October 1st, 2018 to October 1st, 2019, these impressive 12-months gains tumble all the way to a measly 0.5% annual return! That’s right, just half-of-a-percent in 12 whole months!  If our calendar went from October to October instead of January to January, the second-best year in two decades turns into a very forgettable performance. Ouch.

While we need to question these somewhat arbitrary rolling periods when making performance comparisons, there are times when the calendar actually matters to the market. It isn’t so much about the calendar itself or even the seasonality of the business cycle, but how institutional investors’ performance is measured and how their managers are paid.

Most institutional funds are judged by their annual performance and that means the managers running these funds live and die by where they stand at the end of every calendar year. There is nothing more important in their world. Next in importance comes the quarterly statements that get mailed to investors. If you want to keep people’s money, then you better show respectable gains at the end of every third month. And lastly, monthly gains, but they don’t matter as much because only the nerdiest of the nerds keep track of those.

Institutional money managers’ entire mindset revolves around March 31st, June 30th, September 30th, and December 31st. All of their decision are driven by how they will look on those four critical days. And since most market moves are propelled by institutional buying and selling, those four days matter to us too.

Currently, there is a lot of pressure on large money managers who are trailing this very impressive year. If they cannot match the market’s gains, at the very least they need to be able to tell their investors that they are in all the right stocks and that the results will come. This chasing of performance is what gives us strong moves in the final months of good quarters and years.

But here’s the important thing, once the calendar rolls over to the next quarter or year, these institutions are starting with a clean slate. Those that were compelled to buy in the final weeks of the year no longer need to chase prices higher because they have just been given three months of breathing room.

This herd buying and selling ahead of the end of quarters and years is what gives quarters and years consistent personalities. Quarters and years are most often up, down, or flat. But once those quarters/years end, we move into a new quarter/year, one that most likely will have a much different personality than the one that preceded it. 2019 was a good year for stocks. Chances are, 2020 will look a lot different. Be ready for it.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $STUDY

CMU: How to trade the news in our current environment

By Jani Ziedins | Free CMU

Cracked.Market University

How the news affects the stock market is one of the biggest enigmas in trading. Intuitively, bad news should make stock prices go down and good news makes them go up. Unfortunately, it is rarely that simple. This often contradictory puzzle of news and the stock market is the number one reason people claim “the market is rigged”.

While news is important to the stock market, the thing most people forget is news by itself doesn’t move prices, only traders buying and selling can do that. If we take this concept to the next level, it isn’t news driving market moves, but traders’ reaction to the news that matters.

Why this distinction is so important is because all traders come to the market with expectations. Expectations and beliefs about what will happen next. That means it isn’t whether the news is good or bad, but if the news is better or worse than the crowd expects. This is where the confusing paradox of “good news is bad” and “bad news is good” comes from.

Traders often correctly anticipate a piece of news and they trade the market ahead of it. And when their intuition proves right, rather than make money, the trader gets hit with a stinging loss when the market moves in the opposite direction of what it “should do”. When traders get the news right but lose money is when they start claiming “the market is rigged”. Sound familiar?

The mistake is thinking the market should react to the news. What we really should be focused on is the market’s reaction to the news, not the news itself. This is concept is extremely important in the current environment. Trade wars, Fed interest rates, and hints of a looming recession have may traders running scared. But paradoxically, the stock market remains stubbornly stuck near all-time highs.

If a person was only looking at the headlines, it would be easy to assume the market is well on its way into a bear market. But if we look at the market’s reaction to these headlines, we actually see the opposite. A market that is frustratingly indifferent.

If our goal is to make money, then we should be trading the market, not the news. No matter what we think of these headlines, the only thing that matters is what the market thinks. Keep that in mind when you place your next trade.

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Tags: CMU S&P 500 Nasdaq $SPY $QQQ $study

CMU: Bad Luck Brian buys the dot-com bubble

By Jani Ziedins | Free CMU

Cracked.Market University

If I asked a crowd what was the absolute worst time to start investing over the last few decades, no doubt the most common answer would be at the top of the dot-com bubble. Everyone knows the story. The tech-heavy NASDAQ peaked in March 2000 above 5,000, and it took another 14 agonizing years before the NASDAQ returned to those highs. In the meantime, the Nasdaq plunged more than 70% from those heady highs.

So exactly how bad would it be to start investing at the peak of the dot-com bubble? Let’s find out. For this exercise, we recruited Bad Luck Brian. In 2000, he graduated from college with an engineering degree and landed his first real job in March 2000. Following the advice of everyone around him, he started investing in the tech-heavy Nasdaq. He told human resources to take $500 out each month and put it into a zero-cost Nasdaq index fund.

And true to his name, Bad Luck Brian promptly forgot about his recurring investments in tech stocks. While the smart people were pulling out of their investments during the bloody tech collapse and subsequent recession, Brian continued throwing $500 away every month. He was buying the Nasdaq as it tumbled -10%, -20%, -30%, -40%, -50%, -60% and he even bought when the selling climaxed at -70%. What an idiot, right?

So given how unlucky Brian is, how horribly awful did his investment turn out? The attached chart shows his returns versus the Nasdaq. As expected, the first few years were terrible. Brian lost more than 40% his principle in those early years. But even then something strange was happening. Even though the Nasdaq kept falling, Brian’s losses were consistently smaller than the Nasdaq’s. When the index was 70% under the highs, Brian was only down 40%. While no one wants to be down 40%, that is definitely better than -70%.

And the outperformance didn’t stop there. Believe it or not, Brian’s account actually reached break-even in November of 2003, more than a decade before the Nasdaq could do the same. How could this be?

No doubt many of you already realized why Brian’s account was performing so much better than the Nasdaq. That’s because he kept buying the dip. With every paycheck, he stuck more money into the market. And the further the Nasdaq fell, the more stock Brian was buying.

If we assume one share of the Nasdaq fund cost 1/10th of the index value, with his first $500 in March of 2000, Brian bought approximately 10 shares.  But the next March after the index collapses 55%, Brian’s $500 bought more than 20 shares. In fact, the Nasdaq fell so far that at one point Brian’s $500 was buying nearly 40 shares a month!

And lucky for Brian, he kept buying those discounted Nasdaq shares for more than a decade. Accumulating 20 and 30 shares per month started paying off handsomely when the index finally climbed out of its hole. By the time the Nasdaq recovered to the old highs in 2015, Brian had been able to buy so many shares at a discount that his $93,000 of invested principle was worth $204,000! The index was flat, but amazingly Brian was up 120%!

And it didn’t stop there. Brian kept plugging away and just a few years later, Brian’s $500 per month in 2018 is now worth more than $300,000! Not bad for someone who started investing at the worst time imaginable.

What can we learn from Bad Luck Brian’s? Instead of fearing dips, we should embrace them. Rather than pull back on our contributions, we should double them.

Currently, the stock market is down 15% from the highs and people are running around scared. While they are afraid prices could fall even further, I’m over here wishing we could be that lucky. Bring on those cheap stocks!

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CMU: How much worse will this get?

By Jani Ziedins | End of Day Analysis , Free CMU

Free After-Hours Update:

Tuesday was another ugly open for the S&P 500 as overnight weakness in Asia and Europe pressured our markets. We crashed lower at the open and undercut this selloff’s prior lows near 2,710. But rather than trigger another avalanche of defensive selling, that early dip was as bad as it got. Supply of nervous sellers dried up after the first hour of trade and we recovered a majority of the losses by the close. Not very often does a 0.5% loss feel like a good thing, but that is what happened today.

Even though Trump’s tariffs haven’t done much harm to our economy, they are strangling the already weak Asian economies, most notably China. While this is Trump’s desired outcome, global markets are more intertwined than ever and what huts one is felt by everyone else. By taking down China, Trump is indirectly taking down our markets.

The biggest question is what comes next. Is the worst already behind us? Or are we on the verge of another tumble lower? I wish I knew for sure, but the best we can do is figure out the odds and make an intelligent trade based on the most likely outcome. For that, a look back at history is the most logical place to start.

The above chart shows pullbacks in the S&P 500 from all-time highs since January 1950. That gives us nearly 70 years worth of data to analyze.

One of the most notable things is how rare big selloffs really are. Over the last 69 years, only 11 times have prices tumbled more than 15% from the highs. We often think of big crashes like 1987, the Financial Crisis, or the Dot-Com bubble. But those events are exceedingly rare. All the other pullbacks over the last 69 years have been 15% or less. While 15% is a lot, it isn’t terrifying. And even better, all of those under 15% pullbacks were erased within a few months. Small and short. That sounds like something we can live with.

Currently we find ourselves 7% from the highs. Those losses are already behind us and we cannot do anything about them. But we can prepare for what comes next. Assuming we are not on the verge of another Financial Crisis or similar catastrophe, the most likely outcome is a dip smaller than 15%. From current levels, that is another 8%. But that is the worst case. The actual dip will most likely be smaller than 15%.

Over the last 69 years, the S&P 500 has tumbled between 10% and 15% 22 times. That’s about once every three years. Not unheard of, but not common either. The last pullbacks of this size were 15% in 2016 and 12% earlier this year. Are we due for another one? Maybe. But it definitely doesn’t seem like we are overdue given we already had two over the last two years.

More common are pullbacks between 5% and 10%. There have been 36 of these over the last 69 years, meaning these happen every year or two. From 7%, that means we could be as little as 1% or 2% from the bottom. And even better is most of these 15% or smaller pullbacks return to the highs within a few months.

We are down 7% and there is nothing we can do about that. But going forward we have a decent probability of only slipping a little further. And assuming the world doesn’t collapse, worst case is another 8%. While that wouldn’t be any fun, is that really worth panicking over?

The price action has been weak the last few days and that led to today’s weak open. And the market loves double-bottoms, meaning we could see a little more near-term weakness. But what is a little more downside if we will be back at the highs in months month? While I cannot say the bottom is in yet, the odds are definitely lining up behind buying this market, not selling it.

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Jani

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CMU: Are you addicted to stock quotes?

By Jani Ziedins | Free CMU

Cracked.Market University

One-hundred years ago a person was lucky if they could find weekly stock quotes. Fifty-years ago most traders lived off of daily quotes from the newspaper’s financial section. Thirty-years ago we got 24-hour news networks. Twenty-years ago the internet gave us 20-minute delayed quotes. Five-years ago real-time and after-hours quotes came free with most trading accounts. And now countless phone apps give us access to global stocks and futures around the clock.

The question few are asking is if this abundance of information is actually helping the average investor? Given the success rates of the typical retail investor, the answer is clearly not. The question then becomes if this is not helpful, is it actually hurting investors? There is a pretty compelling case that information overload causes a person to make more mistakes, especially when it comes to something as tricky as the market.

Who among us hasn’t found themselves transfixed by an intraday move? We get an alert on our phone and stop what we were doing to read the linked article. Then we tune the TV to the financial news to find out what the “experts” think. All of a sudden we went from having a good day at work to being worried the latest selloff means will delay our retirement five years. But we won’t be innocent bystander. We won’t be a victim to the market’s wrath. Instead we take control of our financial destiny by whipping out our phone, logging into our brokerage app, and start selling. And best part is we do it all in the five minutes before our next meeting.

Unfortunately what started the day as a buy-and-hold investment quickly turned into a “sell everything before things get worse”. The problem for most long-term investors, turned spur-of-the-moment traders is that over the last 30 years, there have only been two instances when “sell now before things get worse” was actually a good idea. The 2000 dot-com bubble and the 2008 financial crisis. Two and only two times over the last 30 years was reacting to the fearful headlines a good idea. Compare that to the 1,000+ plus phony stock market crashes that spooked investors out perfectly good positions just before rebounding. Would you rather put your money on the 499, or the 1? Unfortunately most retail investors are so afraid of the next stock market crash that they have an irrational fear it is hiding around next corner. Combine those emotions with an endless stream of market headlines and stock quotes and that is the perfect recipe for over trading.

And I will be the first to admit this happened to me. I used to trade newspaper quotes. Buy something, forget about it for a few weeks or months. Check the newspaper and “wow, I just made 20%, cool!” Then the internet revolutionized trading and let me follow the market more closely. But the 20-minute delay kept me from obsessing over it too much since the prices I saw were already old news. I’d buy what I wanted to buy and then get on with my day. Then high-speed internet came along with real-time streaming quotes.  Now I could put charting programs and stock tickers on my second monitor (because one monitor definitely isn’t enough), and now I could start counting pennies. It would have been nice if it stopped there, but now my phone gives me access to S&P500 futures around the clock. (speaking of stock futures, they are up nicely in Asia as I write this at 10pm MDT) And the worst of all, if I wake in the middle of the night, it is hard to resist the temptation to see what the futures are doing in Europe. If my trade isn’t working, then I have to pull out my iPad and find out what happened. And people call this progress???

I’ve been there and done that, as have many of you. I can and will attest this most definitely didn’t help my trading. In fact, the access to endless information made me miserable and my trading suffered. These daily gyrations got to me, even small moves against me inevitably lead to second thoughts. Second thoughts lead to doubt. Doubt lead to anxiety. And anxiety lead to impulsive and emotional trading. All of this certainly makes me miss the old days of waiting for the daily newspaper, looking up my stocks, and then spending the rest of the day not thinking about the market.

More is most definitely not better and the addiction to endless streams of information is something we need to resist. Without a doubt the worst thing a person can do is check stock quotes in the middle of the night. Don’t do it. It doesn’t help and all it does is lead to crushing anxiety and sleepless nights. Same goes for getting alerts on your phone. Turn them off. If you are not a day-trader, you don’t need to have real-time quotes and charts on your computer. If you are a buy-and-hold investor, don’t look at daily quotes. Don’t even look at weekly quotes.

The most important thing to regaining control of your trading is only looking at the market with a frequency that is appropriate for your holding period. Retirement accounts? At the very most look at them quarterly and even then only for rebalancing. It would be better if you limited checking retirement accounts to once a year. Swing-traders who hold positions for days and weeks should limit themselves to daily quotes. Only day-traders need streaming quotes and live charts. For everyone else, all it does is shake your confidence and lead to impulsive and emotional trades. The first step to beating the market is getting your addiction to stock quotes under control.

Jani

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CMU: The dangers of trading sentiment

By Jani Ziedins | Free CMU

Cracked.Market University

All too often we hear the cynics claim the market is “too bullish”, or the optimists shout the market is “too bearish”. What they are really saying is they believe the market has gone too far in one direction and it is about to reverse. And they will be right…..eventually.

Without a doubt the market will reverse because it always does. Prices move in waves and I will cover the psychology behind these waves in another CMU post. (Sign up for Free Email Alerts so you don’t miss it) Unfortunately the key to making money is timing those waves exactly right. This is where popular sentiment indicators often let us down.

“Too bullish” or “too bearish” are vague and subjective. There are quantifiable sentiment measures like AAII’s weekly sentiment survey, but it is far from comprehensive and it tends to jump around. Stocktwits measures real-time sentiment in its $SPY stream, but that only tells us what a very small and highly active group of traders thinks. Other tools look at option premium, but they are equally flawed. That’s because sentiment can sustain extreme levels for months, even years.

It is best to think of sentiment as a secondary indicator. It tells us when to start thinking about something, but it doesn’t tell us when to make a trade. It is dangerous to say we should buy every time a sentiment indicator goes under 30 and sell every time it goes over 70. That’s because a 30 can stay a 30 for months or fall to 25, all while the market continues to selloff. Buying a dip a month or two before the bottom can definitely be a traumatic experience.

On the opposite end of the spectrum, sentiment has been “overly bullish” almost this entire year. It started with Trump’s election and continued all year based on hopes of tax cuts. Anyone who sold early in the year because the market was “too bullish” missed out on a nice rally. And anyone who was foolish to short this “overly bullish” market had a very painful year.

The reason sentiment measures can stay elevated for so long is they often only measure a subset of traders. For example highly active traders that fill out weekly surveys. Or the options market. While these give us a good idea of what short-term traders think, it leaves out the opinions of 401k investors who don’t follow the market. These passive investor’s opinions change much slower and this year it was their gradual warming up to the benefits of tax cuts that allowed us to rally so consistently and for so long. Even though active traders were “overly bullish”, the wider pool of investors was only beginning to warm up. And it is buying that kept pushing us higher even though most sentiment measures told us we were topped out months ago.

I love trading against extremes in sentiment, but I need the price-action to confirm my trading thesis before I will stick with a sentiment based trade. If the market doesn’t act the way it is supposed to, I bailout quickly because I know how unreliable these signals can be. Don’t let a stubborn opinion about “too bullish” or “too bearish” lock you into a losing trade.

Jani

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CMU: Why it is too late to buy the tax cut rally

By Jani Ziedins | Free CMU

Cracked.Market University

Many times you hear market commentators claim an event is “already priced in” even though it hasn’t occurred yet. What does this mean, how does it happen, and what does that mean for trading? Read on to find out.

The most important thing to keep in mind is people don’t make trading decisions based on what has already happened, they trade what they think will happen. That’s because it is too late to profit on the past. If a stock already went up 10%, then it is too late to profit from that 10% rise in price. But if you think a stock will rise 10% and you buy it now, you make 10% when it increases in price. Successful traders buy before something happens, not after. This concept is obvious, but it has profound implications for how we approach trading.

As traders we are always trying to figure out what will happen before it happens. Will the next iPhone be a hit or a flop? If we know the answer before everyone else, we can profit from that insight. But since we are trading based on speculation of something that hasn’t happened yet, there are risks we could be wrong. And that risk is what creates the profit opportunity. Some people will bet the next iPhone will be a hit, while others believe it will be a flop. The current market price balances these two extreme views and every shade in between. And when sales numbers are announced, one side makes money and the other side loses.

If the outcome is random, then by rule this event cannot be priced into the market because the crowd doesn’t have insight into what will happen. But this rarely occurs because someone always knows something and eventually that knowledge spreads through the market.

Sticking with the iPhone example, we only know for sure how many iPhones were sold in a quarter when the company reports its earnings several weeks after the quarter ends. But there are plenty of ways to get ahead of the news and figure out what those sales numbers will be good or bad. The simplest is your personal opinion. Does the new iPhone excite you? Are you tempted to upgrade? How about your friends? Are they talking about the new iPhone? Do tech writers recommend upgrading or keeping your existing model? What about the lines at the launch? Bigger or smaller than last year? How quickly does the iPhone sellout? How long are backorder times? What are suppliers telling analysts about the size of Apple’s component orders? Even though we won’t know what the official iPhone sales numbers are for several months, traders paying attention to these clues will have a good idea of what the sales will be. And these traders start buying or selling based on what those clues tell them. Once those clues are obvious to the crowd, it is too late to buy or sell the news because it has already been priced in. Great reviews and the stock’s price shoots up. If most reviewers say it isn’t worth upgrading, then the price falls in anticipation of a bad earnings. If you wait to trade the earnings announcement, you will be too late.

This phenomena occurs naturally because traders are always trying to get ahead of each other. Getting there first is how we make money. We buy before the price goes up and sell before it goes down, but we can only do that if we make our trades before everyone else. And to trade before everyone else means we need to be early. And we’re not the only one who trades this way. When the crowd trades early, the expected result gets priced in long before it happens. And if the crowd is right, which it usually is, then the stock market only moves a small bit when the news becomes official. That’s because the bulk of the move occurred in anticipation of the news.

A current example is Tax Reform. Traders have eagerly been looking forward to tax cuts since Trump won the election last November. The S&P500 has risen nearly 30% since Republicans won the White House and maintained control of Congress. In finance class we learned stock prices are based on corporate earnings, but S&P500 earnings are only forecast to be up around 10%. That’s a pretty big gap between earnings growth and stock market gains.  The bulk of the stock market’s gains over the last 13 months are based on hope and anticipation of regulatory relaxations and tax cuts.

If a person was waiting until Trump signed the tax cuts into law, they would have missed 30% in gains over the last 13 months. Thirty percent is a tremendous number and reflects almost all of the tax cut gains. Congress will vote on and approve the bill within days and Trump will sign it into law before Christmas. Without a doubt we could see a one or two percent pop when this happens, but one or two percent pop is peanuts compared to the nearly straight up 30% move we’ve witnessed over the last 13 months.

If a person is waiting to buy until after Tax Reform is signed into law, they are really, really late. And not only did they miss almost all of the gains, they are putting themselves at risk because following highly anticipated headlines we often run into a “sell the news” phenomena. If everyone bought in anticipation of a widely expected event, then there is no one left to buy the news when it finally happens. And the law of supply and demand dictates that if no one buys the news, ie no demand, then prices fall. So not only is the person who waits for the news too late to profit, they could actually end up losing money in the subsequent pullback. There is solid science behind the market cliche, “Buy the rumor, sell the news”.

Without a doubt the stock market can rally can continue in 2018. But we need new reasons to rally once Tax Reform becomes law.

Jani

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CMU: The part of Technical Analysis no one talks about

By Jani Ziedins | Free CMU

Cracked.Market University

Pick up any Technical Analysis textbook and you are bound to find countless examples of highly profitable chart patterns. Most books include a plethora of real-life charts showing a pattern developing, the buy signal, and the predicted move. The general idea is to memorize the various patterns, look through charts to find them, place a trade, and profit. Easy-peasy. Repeat over and over until fabulously wealthy.

Or at least that is how it is supposed to work. Unfortunately nothing in the market is ever that easy. While most of these patterns are valid and have sound human psychology principles backing them up, the problem comes from false positives. When a chart starts with the perfect setup, but it fails to complete the pattern. The idea of false positives is further complicated because so many patterns look similar. While this wouldn’t be a problem if similar setups told us to do the same thing, unfortunately most setups can give us conflicting advice.

• Buy the higher-high, or sell the double-top?
• Buy the dip, or sell the violation of support?
• Cup-with-handle, or stalling at resistance?
• Meaningful pattern, or random noise?

There are countless examples where a pattern works beautifully and any Technical Analysis writer worth his salt can find charts showing the pattern working exactly as it should. The problem comes from all the false positives. How many times did this exact pattern show up and fail to behave as predicted? False positives are the bogie no one talks about and is the biggest challenge in trading with Technical Analysis.

The pure technical trader claims nothing matters except the price-action. The company name, industry, financials, profitability, news, and all the rest doesn’t matter because the market has already incorporated all of that information into the price. The pure technician believes fundamentals are redundant and he ignores them.

Unfortunately ignoring everything except price leaves out a lot of useful information. Take one of the conflicting examples I listed above, higher-high or double-top. Nearly identical setup, but much different outcome.  One interpretation tells you to buy, the other tells you to sell. What should you do? Like everything in the market, the answer depends.

Most of the time the answer lies in the pieces of information the true technician ignores. Namely the news and the market’s reaction to it. No matter what the chart tells you, a stock that goes up on bad news is a great buy and a stock that stops going up on good news is one to run away from. I will dig a lot deeper into interpreting the news in another CMU post. Sign up for Free Email Alerts so you don’t miss it. 

Now don’t get me wrong, I’m not bashing the usefulness of Technical Analysis. It is a great tool and I use it every day. But like any tool, it has its limitations. Successful traders recognize profitable patterns, but they also recognize the false positives. Or which pattern is more meaningful when similar setups are giving conflicting recommendations. Learn and use Technical Analysis, but always be aware of the risks posed by false positives and develop a process to weed them out.

Jani

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