Trend Changes, 28 February 2010

By Dave McLachlan

As I was walking through the investment section of my local bookstore the other day, I noticed an amazing thing – the majority of books out there on trading and investing don’t actually show you a solid method at all – instead they focus on the psychology of trading or investing. 

It got me thinking – yes the market can be a difficult place to be.  You might buy a share and it drops.  You might sell a share and it skyrockets.  And as humans, we don’t really like to be wrong.  But there is a better way to handle this than merely focusing on your psychology.

What is that way?  Simply, focus on your system, on your trading plan.  This is where you define your entry points and exit points clearly and mechanically, so they can be duplicated over time.  When you’ve done this, back test your method over at least the last 10 years.  If it has a positive expectancy, then use it in the markets.

Some Facts On Trading and Investing

Maybe some facts on investing will help:  some of the best traders and investors are only right around 50% of the time.  Yes, even Warren Buffett has made some spectacular blunders – many to do with derivatives which he has also publicly advised others against.  Michael Covel in his book “Trend Following”, found a fund that made a solid 30% plus return per annum over 10 years had a win percentage of just 53%. 

So it doesn’t matter how many times you win up to a point - more how much you win when you do versus how much you lose.  And if you have created a trading plan with solid entry and exit rules, and know their probability, you will be much closer to trading success than you think.

Trend Updates 28 February 2010

Looking at the big stocks this week, only QBE has confirmed a change in trend, making a Dow Theory exit – an exit that gives it a win 73% of the time.  Westpac Bank is very close to a resumed up trend, but has not yet confirmed.  A close above the trend line and the previous two peaks would give us the signal, with a 66% win rate.  Sometimes, one just has to be patient.   

Happy trending!

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February 28, 2010  Tags: , , , , , , ,   Posted in: Market Watch Weekly

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