It Feels Good When the Market Goes Down!
Editor’s Note: The following is an article that Steve
Gabriel wrote back in late-September about how market drops, many times,
provide opportunities. With the S&P 500 dropping 1.1% last week, we felt
that this would be a great time to republish this article:
The S&P 500 is down about 1.5% over the past week (the week of
9/22/2006) and I have become more and
more excited as the markets have dropped. No, not because I am short the
market, but because there is opportunity developing in the markets. One of the
biggest differences that I have noticed since trading successfully (vs.
unsuccessfully) is the excitement that I feel when the markets begin
performing poorly.
When I first started trading, I would find myself disappointed when the
markets performed poorly and gleeful when the markets were rising. It only
makes sense. When the markets were rising, I was making money; I was hopeful.
I felt that there was more to come, and I would often buy more positions
especially since I found myself having more buying power during these periods.
Then, out of nowhere, the markets would begin to fade, and I would lose my
newly created capital. Often, I would lose more on the way down then I made on
the way up. Certainly this was because I had more capital invested on the way
down. If this sounds familiar…it is time to change.
The first thing to understand is that the more risk that is involved, the more
discounted a position is. You get paid to take on risk. This is essentially
how markets work. When a stock position goes down day after day, it is “riskyâ€
to enter the position. After all, you do not know when it is going up. Once it
begins moving upwards–then, we all feel more comfortable (it has started
going up, so there is less risk of it going down–the downtrend has broken),
but we now must pay a higher price. Some people feel that it must go up over
several days and clearly break its’ downward movement (more safety, less
risky). Unfortunately, once the stock is much safer, it is also more
expensive. And, those that had taken on the risk are now paid (to sell it in
the safer, less risky environment).
I know this sounds awkward, but over time your mind will be accustomed to the
opposite of what is instinctive to all of us. It takes multiple times of doing
things right before your brain will begin to realize (naturally) what is
really the right times to buy and sell. This is why I like systematic trading.
It forces you to do something (buy or sell or do nothing) that you would
otherwise hesitate to do. Over time, with multiple successes you will
subconsciously realize when those times are that you should be buying and
selling, and you can tweak your own personal style from there.
The real point that I am making is that you want to be a seller when the
market is up (when it is exciting, and less risky), and a buyer when things
look uncertain and the markets are moving down over several days (when, “who
knows what is going to happen nextâ€). If you do this, you will quickly realize
that this is the “right†way to trade. Your account just works right…You
will have plenty of capital to deploy as the markets move downward, and you
will let your positions go as the market gets stronger, and take capital in.
When I first started doing this, I felt a bit out of my element and nervous. I
thought that I would lose everything…that is what everyone is thinking. That
is what risk is…that is what you will get paid for.
As for myself, over the last couple of days I have been deploying my capital
into the uncertain market environment. I was mostly in cash as of a week ago,
and now I am back in again buying up risk. It also is quite fitting that
within the Power Ratings there are currently 34 stocks with a rating of 9 or
10 and 18 stocks with a rating of 1 or 2.
Good Luck with your trading…
Steven