In Part 1 I outlined why “You can’t time the Markets” comes about, but what are its flaws?
As always, if you have not endured Part 1 yet, you really should read it first or none of this will make any sense (I am not guaranteeing that it will make much more sense even if you do read Part 1 but at least you might have a fighting chance) and you can find Part 1 here:
In Part 1 I outlined why “You can’t time the Markets” comes about, but what are its flaws?
I strongly recommend that you read Part 1 of these Blogs before attacking this chunk - otherwise it probably won’t make a whole lot of sense and it is really key that you understand what is meant by Upside Breakouts and Consolidations in particular. You can find Part 1 here:
The Stages of the ‘Trading Bases’ Approach
Right, you need to concentrate for this bit. If you are a bit jaded - you know, big night on the Fevertree and Gin last night or ‘too many beers’ (yeah, I know that is impossible but I‘m sure that never stops you trying to find the limit) - then go and get a stiff Black Coffee and take some deep breaths to get mentally and emotionally focused.
I must have had this Blog in mind for the best part of three years and the simple concepts within it I have explained to various people in the Pub many a time since I first figured out what Jason @Stealthsurf was up to. What had stopped me writing it up until now was an inability to figure out how to ‘draw’ it and it was only after mucking around with Microsoft Paint to do those ‘Mechanics of a Trade’ Blogs that I realised I had found a tool to enable me to create what was needed here.
OK, I have to admit that despite my truly remarkable MS Paint talents, some of these pictures can hardly be called a Rembrandt or Van Gogh (and I have both my ears thank you very much !! …….or I did last time I looked in the mirror…..) but hopefully they are clear enough and simple enough to get the key points across and to provide Readers with either an entirely new way to go about doing things or at least to give a lot more appreciation of ‘Break-outs’ and how this could help boost their Trading/Investing Returns.
This Blog Series covers some pretty complicated stuff and I recommend that you read Parts 1 and 2 before you attack this one - you can find them here:
Example 3 - You want to buy 3 Shares in Company XYZ - a ‘Tree-Shake’
This next situation only tends to happen on Small Stocks which are illiquid and where the actions of one Market Maker can affect the Price - on a large and liquid Stock, this kind of thing simply cannot happen as in effect it can throw up an arbitrage opportunity where another Market Maker can take advantage of the artificial Price move and in addition such big Stocks are watched by Traders in general for every tiny move and any mis-pricings would be quickly bought or sold away.
This subject is quite complicated so if you have not read the first Part then it is probably best to look at that first - you can find it here:
Example 2 - You want to buy 3 Shares in Company XYZ but this time you use a ‘Limit Order’
The basic Assumptions are as I listed at the start of Example 1. This time you still want your 3 Shares in XYZ but because it got kicked back at you in Example 1, you have decided to use a Limit Order through your Broker, where you indicate a maximum Price you are prepared to pay for the Shares. For this one, here are the steps as your Order flows through the various Processes:
This is such a strange time for me on the Markets - I guess maybe all Summers are a bit like this but I seem to be doing less with regards to my Stocks and my Investing stuff in general than I have done for a long time. The reason behind this is really that I have no interest in buying anything at the moment and I am happy to just let my Stocks do what they are going to do and in the meantime I will get out and make use of the Sunshine (when I can because obviously in mid-afternoon it is crazy hot some days and it is hard to do anything) particularly with regards to sorting out my BMW‘s paintwork.
Fortunately I have made great progress on the Car and now I have just a bit of Lacquering to do and then I have to wait for about a Week before some areas I have painted and lacquered can be T-Cutted and Polished to get them nice. I had a bit of a result today because I did some painting on the Front Bumper a few years ago (the opposite ‘end’ to what I have been repainting lately) and it has looked very rubbish for a long time. I was looking at it and it occurred to me that if I got the T-Cut out and put some work into it (and my goodness it is really hard work when you are polishing by hand in this heat !!) then maybe it would look better. Anyway, I got stuck in and now it looks really good - it is about 9/10 and I am so pleased. Why the hell didn’t I do this a few Years ago instead of just looking at it and thinking “Flippin’ ‘eck, that Bumper looks cr*p”? - classic ‘Learned Helplessness’ psychology !!
I often get ideas for Blogs from various chats on Twitter and this one has come about in this way, and it also has the added bonus of being sort of linked to the recent lengthy Blog Series I wrote on ‘Wheelie’s New Improved Index Trading System’.
We were having a debate about what drives Indexes in terms of Price Rises and Falls etc. (I think it was with @Old_Man_Trading who is really hot on the TA stuff and well worth following on the Tweetster) and I put forth the idea that to a large extent we cannot know what is driving them as there are simply too many factors involved. To illustrate this, let me start off by listing things that might be drivers, and note they can probably be broken down into a few Headings:
Some time ago a Reader emailed me with some Questions about how I learned to muck about with Charts and I have reproduced much of it here and added a lot to it. Apologies to that Reader if I did not ask your Permission to do this but I have been very careful to remove any references that might give away your Identity and you seem like a reasonable Chap so I am sure you will be happy that I share this around. And I am confident you will appreciate the improvements I have made to that original text !!
There is a bit of common Folklore that goes along the lines that the moves of a Share Price can indicate what is going on within a Business and that this should be a major factor in our Buy, Sell or Hold Decisions. I guess it is an extension of the Efficient Market Hypothesis (EMH) which is more of a Macro concept whereby Economists make the claim that a Share Price, Asset Price or Index Level is merely the Market reflecting all known information about a Share or Economy or whatever and it purports the idea that “The Market is always right”.
Or is it?
Well, perhaps there is some validity here but overall I would say the EMH is utter garbage - it is perhaps a wonderful Academic Exercise (and regular Readers will be aware most likely of how much I see little use for such Trash and I only respect such Theories if I have seen them to be true in my immersed experience of Markets over many years) but in truth it probably would only apply to a ‘Perfect’ Market where all Information available at a Point in Time is known to all the Participants in that Market and they react rationally and with 100% accuracy in an instant. I guess the flaws here are rather obvious apart from the simple fact that in The Real World (ah, the WD strapline !!) there is no such thing as a Perfect Market. It is a theoretical construct to help explain how Economies and Markets work but it is of little value to us as Investors (or Traders).
Last Week turned out to be a bit of a pain for me - from Monday to Wednesday nothing much seemed to happen and then things tailed off at the end of the Week so my Portfolio took a hit of 1.2% over everything (excluding my Income Portfolio which I rarely look at). This continues my angst at failing to see my Portfolio Breakout of its All Time High which was put in back in May and I feel like much of the Year has achieved very little !!
However, as always we need to stay calm about such situations and focus on the positives and what has really been achieved - even if the Numbers are not reflecting it yet. There was an excellent TED Talk (Rory Sutherland - ’Perspective is everything’) which my mate Tom Tomsky @calvoreon sent me on Twitter which was about Psychological Framing and Perspective - the basic essence being that how we experience things that happen in our Lives etc. and how we let them affect our Emotions/Decisions, is largely down to how we set the context of whatever has happened. I am not explaining this very well, so rather than me jibbering on, check out the Talk yourself here - it is 18 minutes long and actually quite funny:
First off I am having a very good year despite the flat recent Months - this is something that obviously I should celebrate and not get too down about. In addition, I have a nice collection of Stocks and I expect to see nice upside from the majority (or at least decent Dividends) in the Months ahead - and as we will see below, several of my Stocks are in very interesting Technical Situations where they are on the verge of All Time High Breakouts (don’t switch off already, I am going to do a proper explanation of this !!).
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