Trading Tactics
Our portfolio service is designed to attract patient capital that doesn’t get troubled by broader market conditions.
Recently I discussed the benefits of weekly data (see Stockradar blog – The primary motivation for using the weekly time frame is for perspective), which suits the majority of my SMSF members as it is employed to avoid the damaging distraction of intra week noise and in turn it allows a little more time for ourselves. It is one of the many controls we use to help us focus us on the big picture. The discussion centred on getting a real perspective on the market action and not to be distracted by inconsequential daily noise. Today I will to discuss the trading tactics that can be adapted to various market conditions.
As investors we have to understand that what trends do is, they pullback. It’s natural, and it’s healthy. It consolidates rallies meaning sentiment or crowd behaviour is not ‘over heated’. These are important aspects to understand when trading to help us not get rattled or emotionally distressed which is a common affliction. Trading is about control and behaving in a cool, calm manner so we shouldn’t be troubled by these counter moves, unless our stops are triggered.
Anticipation doubt and worry are all emotions we can entertain if we want to. It’s a bit like the choice we make with regard to taking losses. It is your choice. If you don’t want big losses to occur you simply don’t let them happen.
Using the weekly time frame and only looking at the market once a week can be very refreshing and liberating. But in another facet of market behaviour we get stocks that run on relentlessly with only very small pullbacks, if any. Current examples may be A2M, TWE, CTD and QAN. They are exciting, they can also be dangerous but they offer great profit generating potential. We need a heavy dose of discipline to trade these moves effectively and of course an ability to divorce yourself from the heightened emotions that usually surround them. They eventually all come back to earth with DMP probably being our most recent example of a stock carrying the weight of market expectations that when not met cause a correction to occur, to put it mildly.
Stockradar’s entry strategy is based on an understanding of price and volume movement, and the belief money management, and not necessarily market knowledge, is the most effective way of managing trades and the excesses of greed and fear. To me they are two separate things. As perspective and reality is lost by the crowd the irony is that that is what drives the excessive price moves and by using money management tactics we can be capitalise on them very effectively. The stocks I have mentioned above are all great examples and have been great profit generators for us.
Money management provides a degree of insulation from market excesses by using stops, in this case to protect profits, rather than limit losses. Market traits, fundamentals and valuation metrics may change over the years but price action does not change it still moves up and down driven by sentiment. I don’t regard fundamental analysis as a good protection these days and the necessity of enduring big drawdowns, which may or may not come right. Best not to be exposed to them at all.
We have got so ‘mixed up’ with valuations and we get ‘caught up’ in fads. The information highway has exploded, mostly with garbage. The reporting season to the newcomer must also be a frighting initiation to the stock market. How can prices move so much on investor whims? Sometimes it doesn’t seem to make any sense. They are distractions we don’t need to respond to. Most investors won’t survive today’s stock market unless they accept that reality of stock market behaviour and have a well thought out strategy for market engagement. If we have control and discipline and confidence in our trading strategy we will win. This is war. Let’s rattle the cage.
‘because the only stock market advice you can trust is the price action’
– the price never lies.
