Revisiting Stanley Kroll's writings. Practical words of wisdom... How often do we see traders behave in a 'headless chook running in circles' mentality listening to tips and gossip, others' market opinion, having undisciplined wishful thinking, having a 'desire to be short'.. Sound like the current situation?

Hong Kong Index futures provide excellent trading opportunities and action for speculators. Yet, throughout the three years, from 1991 through 1993, during a period of generally rising stock prices from a world class bull market, where prices rose from approximately 3,000 to over 12,000 (see Figure 4.2), traders continuously probed the short side of this stunning bull market. Every time there was some bearish—sounding news in the press, every time some commentator or interviewee delivered a bearish pronouncement, and especially when any British official talked about Sino-British

Figure 4.2 Long—term weekly chart of the HANG SENG INDEX, for the period July 1990 to July 1994. Note the impressive bull market lasting four years, during this period.

disharmony, the market suffered a serious bout of 'bear attack.' In fact, during late 1993, when the Hang Seng was undergoing its most violent and steep upwards move, I watched in amazement as a large office full of traders and account executives peered intently at a small TV monitor listening to a speech by Govemor Chris Patten while the market was open. During the course of the speech, every time the Governor mentioned any aspect of Sino-British problems at the negotiating table, a flood of long liquidation and new short selling engulfed the market. Traders were  pparently willing to totally overlook the ongoing trend of the market, which was clearly one way; up. In fact, over the course of several months of an upward trending market, I heard dozens of pronouncements from brokers and traders that they were selling the Hang Seng for a number of diverse reasons.

0 The market looked overpriced'

0 The market was due for a big correction

0 They had received a bear tip that prices were about to turn down

0 The principal reason for the rising prices had been massive buying by a big New York investment house which would shortly reverse to short and take the market down again. 

In reality, the market was in a clear-cut and distinct uptrend and there was no viable, objective reason to play it short.

A large body of speculators had succumbed to a combination of undisciplined wishful thinking and a desire to be short in the market (they had liquidated long positions prematurely because prices were 'too high,' so they would now prove their acumen by getting aboard the short side). The great quantity of 'red ink' that accompanied these short positions was additional evidence, as if traders needed such additional proof, that trying to pick off tops or bottoms, against a strongly entrenched bull market trend is invariably dangerous to one's financial health and well-being.

The absolute need for a disciplined and objective approach to speculation, whether it be in stocks, commoditites or currencies, is a recurring theme of this book. We have all had the experience of relaxing our vigilance, of ignoring the real technical condition and direction of a market, which is generally clear if we are willing to see it. And, the results are uniformly predictable; unsuccessful trading and a string of consistent losses. Unfortunately hope versus fear, impatience, greed and, above all, a lack of discipline, are the major impediments to successful operations.

By way of an example; in the summer of 1984, the Chicago grain markeks vere in the process of breaking down from broad sideways trends into clear-cut downtrends. Most of the reliable long—term trend following computer trading systems had turned down, as had most objective chart techniques. This was confirmed, as though further confirmation was required, when the commodity Research Bureau (CRB) grains futures index broke down through the 230.00 level (see Figure 4.3). Yet, the reality of this developing bear trend, so strongly entrenched that it persisted for two more years, was generally obscured by a steady barrage of bullish stories and articles in the business press about poor US growing weather and its damage to crops, unprecedented Soviet grain shortages which would lead to huge purchases of world grains and reduced Canadian crops. So, one has to ask, why were the grain markets sliding into a tenacious downtrend that was to last nearly two years?

A parallel situation was experienced in the metals markets commencing around mid-1984. Most of the market projections, economic analyses and brokerage advisories had predicted improving prices and had clearly recommended the long side of the metals markets. Long side indeed! And, here again, the CRB precious metals index tells the same story (see Figure 4.4). Prices poised on the brink "of yet another downleg, soon to be confirmed by actual market action, during the relentless bear markets of the early 1980s. Digesting such a steady stream of bullish pronouncements could hardly fail to give one a bullish bias. However, an objective and pragmatic review of the technical factors clearly showed that we were