In a recent Blog I sort of hinted at the contents of this particular Blog because it is something that has been playing on my mind for many months and I have only just got around to creating a Blog that gets it down in document form. It has been excruciating because my head has been really buzzing with the desire to write this one but I had other ones to finish and on top of that the sun has been out and I have been messing around with the paintwork on my Z3 again – in essence I cocked up the rear wing for a second time and I just have to get it sorted.
The title to this Blog has been pinched partly from the book, ‘The Art of Execution’ by Lee Freeman-Shor (you can find a copy of this in Wheelie’s Bookshop) although I have probably stretched the true meaning a bit to fit my own view of how I want to run my Portfolio in the future.
If you haven’t read Part 1 yet, you can find it underneath this Blog on the ‘Educational Blogs’ page or simply click this link:
This next paragraph from the Article is interesting – it essentially says that all Market Participants can be a bit mad and prone to psychological errors but that these cancel each other out if these traits are common on both the Sell and Buy side of the market. Problems start when everyone starts thinking the same and this makes sense in my experience. For example, when Fear grips the markets and we get a general sell-off, then people are mostly thinking the same and there are lots of people selling and very few buying – it is only once it gets extremely low that the fearful Sellers dry up and the Buyers can then take the upper hand and before long the people who were Sellers now become Buyers and everyone starts thinking alike again and driving the Prices up. Herd mentality and all that.
“The presence of overconfidence alone doesn’t create an inefficient market. Indeed, a market with overconfident buyers and sellers on both sides creates a heterogeneous, diverse, and therefore wise crowd. But crowds tend to go mad (and thus inefficient) once investors all start to follow the same rules and think alike.”
I was reading Investors Chronicle from 26th April to 2nd May with ‘Breaking the Mould’ on the cover and on page 32 I came across a very interesting article by Alex Newman entitled ‘Finding the Edge’ and it got me thinking and it also struck me that there were some useful concepts in here for me to look further into and to share with a Blog that Reader’s might appreciate.
If you have access to a copy of the mag or the online version, it is certainly well worth a read although I must say that it is rather too academic and theory based for my tastes – I found myself re-reading several bits a few times before I really figured out what point was being made. It suffers I think from the usual issues of being far too over-complicated and I suspect the Academic Research was done by someone who is more of a Professor and Economist than an actual person who Invests or Trades in Shares (or any Asset for that matter). I see this sort of thing all the time - I find it useful because I can take snippets of what the Academic Research covers and think about it in the context of what I do with Stocks and my experience and understanding of how Markets work in reality - and of course in The Real World things tend to be highly different.
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.
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