This is an e mail I recently received and thought I should pass it along…
Norman Hallett here from The Disciplined Trader.
If you’re involved in the markets at all… whether you trade securities, or you have a retirement account, or both (like me)…
…the wild market movements we are seeing may have your head spinning if you’re a trader and deeply concerned if you are watching your retirement account nose-dive.
I’m writing this email to my entire email subscriber list to help you move calmly past this phase.
I’d like to share the perspective of a 66 year old person who has been involved in trading, teaching and managing these same markets for over 35 years…me.
I’ve experienced the pain of being caught in a big move against me, missing a big move ‘I should have had’ and watching my retirement account tumble…
… and over the years…maybe because of my appreciation for Discipline in investing and trading…I have a process of dealing with moves like this and coming out on top. I want to share that with you here.
SOME FACTS…AS I INTERPRET THEM…
If I say that ‘markets always come back’, I’d be right. But I’d be leaving out the timeframe. How long that will take can differ greatly.
Previous corrections in this almost decade-long uptrend have seen recoveries in a matter of months. Why?
In my opinion, it’s because interest rates at historically low levels makes it almost impossible for retired (and other) individuals to earn income through bonds or normal savings means. This means that one of the only liquid places you can see your
money grow is through equities. That hasn’t changed.
So, as all the previous corrections during this current post-mortgage paper crash have seen quick recoveries, this one should too. That, in my opinion, is the highest probability.
Because of the depth of this correction and the action I’m seeing today (the panic), the timeframe may be 6 months or a year, max.
Now, some may argue about the importance of China in the world economy or the fact that Europe still doesn’t have their act together, but my rap about the effects of worldwide low interest rates trumps this.
The high probability, in my view, is that the bigger this ‘correction’, the bigger the opportunity. Much of my retirement money is managed by a pretty conservative
firm. They consider themselves “value” investors. They always keep cash on the side to take advantages of opportunities.
They’ll wait for a confirmed bottom and then they’ll cherry pick high ‘value’ opportunities’ for me.
That’s a good approach.
In any event… think what you like about the market, as traders it’s all about what the charts/price action tell us.
WHAT I WATCH FOR TECHNICALLY
It’s seems that more than not, the kind of correction that we are seeing now is over (at least for a while… and in this almost decade long run, it’s over) when a strong reversal signal is seen.
Many time, and it could be happening today, the formation is a HAMMER, where the market takes a dive (the S&P was down 125 points) and then turns around and ends higher or almost higher on the day.
That formation occurs because all the weak and semi-weak hands give up and sell (plus computer selling kicks in for managed funds and accounts with maximum loss tolerance)… …and that kind of extreme selling does 2 things…
1. Exhausts the selling paper
2. Exposes extreme opportunities (like seeing Apple briefly at 92 today)
What’s left are buyers.
The other formation that often occurs at a bottom is the engulfing pattern. This usually happens when an overnight ‘move’ by some entity or some
guru causes buying interest the next day and buying overtakes selling.
NOW FOR MY MOST IMPORTANT POINT
It is of the utmost importance to control and rule your emotions… namely worry. Or extreme worry.
I’m always harping on my students… and I know you know this, too… Worry does not accomplish anything.
It is your emotional action to your projection of what the current market conditions COULD DO to your financial security… and thus your life.
In situations like we are seeing in the market now, the mind can go ‘way out there’ into ‘my-life-could-be-over-land’.
I know the feeling.
This is when it’s important to understand that your ‘lizard’ brain, the part of the brain that kept us safe from predators as cavemen, thinks
this way to protect us. ‘Flee’ was the response as cavemen..This part of our brain still has benefit to us, but not in financial matters.
These extreme market condition, can ignite deep parts of your brain. Honor it as thoughts of your caveman-self and move in to the way
modern man makes decisions. Reasoning them out. Look, think about it for a second.
Worry gets in the way of reasoning properly from the facts. So, keep focused on the facts and make your move to correct
the situation. Worry will dissipate. For you out there who are more New Age oriented, TFT, EFT
and self-hypnosis are a great way to replace fear and worry with confidence and control.
Replacing your worry and fear with confidence and control means that you’ll chances of making the right decisions are infinitely more likely.
And if you make he wrong decision, you’ll correct it by making a new decision, calmly and professionally.
MY LAST POINT…
Over the last year, I’ve been a serious student of the power of momentum.
Not only in trading, but in my life. If you’ve been watching my 4-Minute Drills or have been receiving my emails for any length of time, you know that
I believe it may be the most important aspect of trading.
That’s why “go with the trend” is a time-honored truth in trading circles.
Trends get interrupted by events or shocks that break the momentum and then create a new opposite momentum (in our trading world of either up or down).
Whether this “shock’ we’re are seeing now will break the current bull market and make it a bear market (I know, I know, some technicians say it already has) we don’t know yet.
But we will see.
And when we see, we’ll act accordingly. I’m so convinced that identifying momentum is the primary key to continuously successful trading, I’ve been working with an expert in Bollinger Bands to get better identifying
momentum.
I feel that Bollinger Bands, used properly (most don’t) is one of the only real predictive indicators we have to track / project momentum.
My timing couldn’t be better with this study. I’ll be telling you more about this soon.
IN CONCLUSION…
Nobody said investing was easy. Nobody said trading was easy. If it was, everybody would be rich.
I say to you…
Control your fear. Control your emotions. Let the charts be your guide. Honor momentum.
You don’t have to be the smartest trader or the most experienced trader.
What you have to be is a trader who has a tested trading plan that works for you and the discipline to follow it.
Godspeed.
(And stop worring!)
And, as always.. Stay Disciplined!