Why there is no such thing as a bad market

A letter that I received from a professional trader bears special significance, as it relates to the subject of this chapter.

‘We have been hearing quite a bit about the difficulty of trading current markets. No sooner does the trend "flip" on many of the technical and computer systems that traders use, and of course, the majority of speculators quickly take positions on the "new trend," than the market suddenly reverses again and goes racing the opposite way. It seems to be a recurring stream of bad markets, and it is happening with increasing regularity. What can the trader do about this?’

This happens to many traders, who become extremely perplexed, and who want to know how to handle these ‘bad' markets. It is unfortunate, but true, that when an investor makes money he attributes it to skill, superior acumen and clever timing. But when he loses money, he tends to rationalize it thus; the market was terrible, too volatile and excessively choppy. Speculators tend to overlook, or to deny, the real causes of losing trades.

It is difficult to admit to misjudgement of the market trend, the trade timing, the placement of stops or the tactical market approach.

Only by acknowledging such errors frankly can we discover where and how we erred and how to avoid such mistakes next time. The universal truth about futures markets is that, except for occasional and unusual brief time periods, the market and the price trends are not in themselves, good or bad, right or wrong. It is the trader himself who is good or bad, or more specifically, right or wrong.

This general commentary probably goes back to the beginning of commodity trading, as many as 50 centuries ago. Even in those ancient days, the winners probably called the markets ‘good,’ while the losers called them ‘bad.’ In fact, during choppy and apparently randomly moving trends, with unexpected reversals, and then reversals from reversals, it is more important than ever to  play a disciplined and objective game. We all get whipsawed from time to time, but it is important not to let such markets upset or unnerve you.

During much of 1993, 1 got whipped in a good-sized Nikkei futures position, despite my best resolutions to play 'by the rules,’  I had been short a line of March Nikkei futures, during the period April to September 1995, anticipating a break in the market. I should have noticed that the market was locked within a broad sideways trading range bounded by 20,000 and 21,500. After a few vain attempts to catch the trend I realized that there wasn‘t one, or to put it more accurately, that the trend was sideways and that I should have waited on the sidelines. In any event, by mid October, I was tired of watching the ‘red ink' all over my statements, and I opted to sit the Nikkei out from the safety of the sidelines. That was just before the market finally collapsed the last week of October 1993, and in very short order, declined from 20,000 top 16,000 - with me watching incredulously from the sidelines.

Yet, during such frustrating and difficult periods, there are always lots of clear thinking and disciplined operators whose accounts appreciate nicely, no small feat during periods of mostly sideways market and listless trends. One of the emotional problems that traders have to face, in terms of being right or wrong, is the subconscious reversal of two basic human emotions; hope and fear.

1. Trader A is long soybeans in the direction of the major (up) trend and is sitting with a good profit. He sells on the first reaction, fearing that if he continues to hold his long position the

market may reverse to down and he will lose his profit.

2. Trader B, on the other hand, is short soybeans against the major (up) trend, and is sitting with a small but growing loss. He will probably sit with the losing position, hoping that the market will reverse its major uptrend (it probably won't reverse, at least while he and others like him, remain short, and start moving south). In the meantime, the market continues its major uptrend and his loss continues to mount.

What we are experiencing are our principal emotions of hope and fear, but disoriented by 180 degrees. Trader A, with his profitable long position, should sit tight, hoping that the favourable moving market will continue advancing in his direction, adding to his profits. Trader B,

on the other hand, sitting with an unprofitable anti-trend position,

 

Figure 8.1 Daily chart of NIKKEI (CASH) traded on SIMEX. This illustrates trends in action, because we have a top through late October, a steep downtrend through late November and then a gradual recovery to an uptrend through late March 1994. should close out, fearing that the adverse trend will continue (as it usually does) and the loss will continue to increase (it too, usually does).

 

The trend of a market is a lot like the weather; it is what it is, and there's not much anyone can do to change it. Or, as Mark Twain once said: ‘Everybody talks about the weather, but no one does anything about it.’ So, if the weather looks like rain, you wear a raincoat or carry an umbrella, whether you like it or not. Similarly, if the trend of a market is down, you play it short, or aside; and if the trend is up, you play it long, or aside - because you can't change the basic trend direction of the market. You either go with the trend, or you suffer the probable losses in trying to buck the trend. There will be those instances when the market trend is down, your position is long, and somehow you end up making money. Or, the trend of the market is up, you go long, and you end up losing money.

Do those experiences contradict the oft-stated strategy, ‘go with the trend?’ Not at all. There are exceptions to every rule, and those types of trades, where you go against the trend and make profits, or you go with the trend and lose money, are merely exceptions to the rule. In like

manner, you may see a golfer reverse his usual grip ‘on the club and sink the putt, does that mean that this is the way to play golf? Not at all. It is just that it worked once, but if he were to try such a stunt over a period of time, the results would undoubtedly be otherwise.

It is only human to become discouraged when trading goes badly. Despite the best intentions and attempts at an objective and disciplined approach, most trades tum out losers. We all have moments like these, myself included. I have found that the best strategy for such periods is to close out all positions and stand aside from the market, for as long as it takes to get your head cleared and your attitude to become more positive. The market will be there, you can be sure,, when you return to action. I am reminded of a story told about Dickson W/atts, a famous old-time cotton trader from the 19th century. When asked for advice by a fellow-trader who claimed that the large size of his position kept him awake at night, Watts had the following to-the—point advice: ‘sell down to a sleeping level.’ It is still a sound advice.