Trading Lessons: No One Is Too Smart to Fail
Patterns change, and investors have to change with them.
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I read Steve Smith's piece about patterns with great interest. He touched upon some important aspects of and misconceptions about technical analysis.
Sometimes, people start to believe themselves to be infallible. But there's no system that's beyond reproach. We've seen a big-time "Genius Fail" when Long Term Capital Management blew up in 1998; in 2007, Amaranth Hedge Fund Advisors exploded, when $8 billion in assets lost 36% of their account value after being up 22% in a single trade.
Clearly, neither the size of their intelligence nor the size of their wallets could stop their downfall.
As Yogi Berra quipped, "Baseball is 90% mental -- the other half is physical." Similarly, trading is a complex mix of analysis, money management techniques, market sentiment and individual psychology.
I believe that learning key aspects of money management is of the utmost importance, and yet it's talked about the least. (On that note, I have some thoughts on position-sizing coming up soon.) Individual investors especially need to learn this, since institutional traders have layers of management to enforce adherence.
Also, patterns change, and investors have to change with them. They often stick with prior patterns, rationalize their stance, and defend their holdings. On July 14, Minyans recognized that there could be 2 ways to play, and the market followed the bullish path.
In my opinion -- and all the media hype about patterns notwithstanding -- the market has behaved in quite an orderly fashion recently.
Indicators pointed to a possible decline.
Sentiment indicators alerted us for a bounce. (This bounce played out as expected on June 25.)
A decline seemed probable again.
The market's extreme oversold condition provided the basis of the recent 6% move in the indexes.
Now we just have to see if the market can continue its recent good behavior.
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