STRATEGIES

Ron Wagner explains how traders can move with the market flow, rather than in spite of it.

When I began trading and investing our own accounts back in 1997, I had no idea how the market moved. I really thought all I had to do was open an account, pick my investments fairly well, and—voila—I would make money. Well, that didn’t turn out the way I had expected.

When I ran into an educational firm in 1998, I began to finally learn about repetitive cycles and the various stages that all financial instruments move in. It was hard to break myself of all the preconceived notions I had about the market. It was hard to break me from my old bad habits and beliefs. When I went to the trouble of selecting an investment, it was supposed to work.

I’m laughing out loud now as I remember those days and how far I have come to master my trading method. In order to really appreciate and understand about “fear” and “greed” and where the footprints of money reside on charts is all that matters for me and all of us to make good decisions for our investments and trading.

One of the largest challenges I realize now that I had back in 1997 and part of 1998 was to understand that we can’t let anyone or anything cloud our judgment in our decision-making process. I now trade completely without concern if the market goes up, down, or sideways. I choose my trades and investments based on the information in front of me at that time.

After all, money does not care what I think! So, I have learned to adjust my thinking of what the charts are telling me. Each chart tells a story to us. Are you reading that story correctly?

We are on the cusp of getting started on "Show and Tell Time" in the markets. Yes, another earnings season is upon us. Make sure to be objective, as you are going to see a lot of very volatile days over the next six weeks. Be ready to adapt! Don’t think you can make the market fit into your plans. Make sure to fit into what the market is doing.

Adapting to Changing Market Environments
Arguably, this is one of the hardest things for a trader to do. Some of the most prestigious fund managers in the world have gone down in flames because they were unable to either spot, or adjust to, changing market conditions.

So let's not fool ourselves and say that only "amateurs" and "the crowd" find these adjustments difficult. It's hard for all of us, and being realistic and honest about the challenges involved gives us a much better chance of maintaining the correct mental flexibility to adapt.

The first thing to recognize is that most human beings don't like change. It's true. I don’t. Ask my wife. The average human being would prefer to acquaint themselves with what is directly in front of them, and then become very comfortable and knowledgeable about that precise set of circumstances.

Yes, there is an obvious spectrum—the super-conservative types on one end and the highly adventurous, pioneering types at the other. Still, it is intrinsic to all creatures (and humans are no exception) to feel most comfortable with that which remains static, and to become most anxious around that which is in a state of flux.

The reason I mention this is to help explain the sorts of underlying behavioral impulses we need to counteract when we trade. I remember quite clearly when I first developed some workable techniques as a trader. I got very excited at the thought that these few specific tools and patterns could make money for me day-in day-out, and sure enough, I had some real success with them initially.

I also remember how disturbed I felt when they stopped working during the collapse of the dot.com bubble. In fact, throughout the early portion of my education process, I kept looking for that one approach that would work "all the time." And every time a teacher or author or speaker on the subject of trading implied that nothing worked all the time, and that a trader needed to constantly adjust, I felt a sinking feeling in the pit of my stomach.

On a rational level, I suppose it was concern that I would have to learn an endless string of techniques to keep myself profitable in the market. On a more gut, subconscious level, I think I was simply afraid of the constant "unknown" of trading. It was an almost primitive fear of something that could utterly change one day, one hour, even one minute to the next.

Next: The reality of the financial markets