As investors, our main objective is to be objective. Logic and intelligence are often the biggest obstacles to success, and emotions provide no benefit in this game. In investing, if you are struggling then you have to go back to the fundamentals that made you successful. Let’s start from the beginning. What makes an asset bullish or bearish?
1) There is a fundamental reason for it to go up in value;
2) There are many reasons why investors talk themselves out of owning it (wall of worry);
3) There is significant short interest in the asset;
4) The average investor has a target price below the current price;
5) The smart money is positioned long;
6) Price is above rising moving averages on multiple time frames;
7) Price has formed an extended base or is at multi-year lows within an uptrend;
8) There is capitulation volume or significant momentum divergences on new lows;
9) Price is impulsive to the upside and corrective to the downside with healthy retracements at regular intervals;
10) Trend lines hold and cycles do not fail.
1) There is a fundamental reason for it to go down in value;
2) There are many reasons why investors talk themselves into owning it (slope of hope);
3) Investors repeatedly try to buy the asset;
4) The average investor has a target price above the current price;
5) The smart money is positioned short;
6) Price is below falling moving averages on multiple time frames;
7) Price fails to make new highs or is at multi-year highs within a downtrend;
8) There is capitulation volume or significant momentum divergences on new highs;
9) Price is impulsive to the downside and corrective to the upside with short-squeeze rallies that lack healthy retracements;
10) Trend lines fail and cycles move below previous cycle lows.
The fact is that nobody knows exactly what the market is going to do tomorrow. The only thing we can do is know our maximum risk and play probabilities based on a variety of different analyses. To be successful we have to move with the bigger players and we have to ignore the things that don’t matter. Regardless of what you have been invested in over the past year, ask yourselves these questions (pretend this is for a long trade):
1) Did I buy something that a lot of other people wanted to buy too?
2) Did I read articles or hear reports of higher prices ahead?
3) Was the smart money positioned in the same direction or were they on the other side?
4) Was price above rising moving averages on multiple time frames or was it below it?
5) Was price able to make new highs or was it getting rejected?
6) Was the investment already extended to the upside?
7) Was price climbing impulsively to the upside, retracing in a controlled manner, and climbing impulsively again?
8) Were trend lines acting as support or were they being broken to the downside?
9) Were cycles forming a series of higher highs and higher lows, or were they failing on a regular basis?
If you objectively ask yourself those questions and give yourself a report card grade, did your gains/losses for the year match up with how you responded? There’s a very good chance they did.
Remember, the market doesn’t care what we think or what our outlook is or what a news article says, it is happy to take our money from us every single day. The moment we forget this and rely on something that doesn’t matter is the moment that we start losing money.
Whenever you feel confused or are struggling with your investments, take it back to the basics. It doesn’t mean that you are going to make money tomorrow or the next day, but if you are habitually making poor investment decisions, then your positions are probably not aligned with the right group from above (bullish/bearish). The market is designed to not make sense and to be scary when you are on the right side of the trade and that is why so few people are ultimately rewarded by it. If you are taking bullish positions when the bullish questions are being confirmed then your job is to manage risk at that point and buy during weakness. If you are taking bearish positions when the bearish questions are being confirmed then your job is to manage risk at that point and short into strength. If your positions are in the wrong group altogether from above then you need to get out because you are likely to keep losing money no matter what you do, because that is how the market works and it is usually an expensive education.