Have The Markets Changed?
Questions we are commonly asked are: Have the markets changed?
Is it different this time? Have advances in technology made it
so the average trader does not have a chance anymore?
These questions are easy to answer, and with complete certainty:
No...
Free markets behave the same as they did 200 hundred years ago.
The same as they did 40 years ago. They same as they did in the
bull market of the 1990s. They are the same today, and will be
the same in the foreseeable future.
Why? Because free markets are never static. Because they always
CHANGE. They are subject to the buying and selling of millions
of participants, each with his or her own viewpoint and / or
expectations.
Any market timer can forecast a rally or a decline and have a
chance of being correct. But try and repeat the feat with
consistency.
The only thing you can absolutely count on is change. Markets
will advance. Markets will decline.
If you have a trading system that is specifically designed to
"use" change, you can take advantage of the market "changes" and
make money.
Changes will not impact negatively on you if your strategy for
handling them is actually based on them. If your buy and sell
signals are created by the ups and downs of the market itself.
Predicting The Market's Future
If change is the only "certainty" looking forward, then how can
one predict (forecast) the market's future?
That is the point. "No one" can predict, with any certainty, the
market's direction. But while no market forecast can be
guaranteed, change "is" guaranteed. "Look at the last 200 years
of market history and you will see that it was in a "trend," one
way or the other, most of the time. " One thing we can be sure
of... if your plan is to just buy and "hope," you will be in for
some very unsettling times. The markets will have incredible
moves in the future, both "up," as well as "down." You will be
ecstatic during rallies, and upset and worried during declines
(and likely depressed and in fear during the inevitable bear
markets that "will" occur in the future.)
Sound like talking in circles? Not all... Let's tie it all
together.
If change is inevitable, the only certain way to profit from the
markets is to follow a plan that is "based" on change. That
actually works "because" changes occur. Because change is
inevitable.
Advancing (and declining) markets that last months and more are
called trends. Look at the last 200 years of market history and
you will see that it was in a "trend," one way or the other,
most of the time.
FibTimer follows trends. No matter how ridiculous those trends
appear to be at the beginning, and no matter how extended or how
irrational they seem at the end, we follow trends.
But Hasn't Technology Changed The Playing Field?
Some would argue that today's markets are different. Technology
has given select traders an edge that takes away from the
average person's ability to profit.
Buy and sell programs, moving massive amounts of stock, take
advantages of fluctuations in prices that no individual can hope
to master.
In fact they "create" fluctuations in prices. For example,
everyone expects to get paid on the date their paycheck is due,
but have you observed what happens when a paycheck is late?
Everyone is quite frustrated and some people can get very angry.
People were expecting a hard earned reward but received no
reward.
"Prices must either go up, down or sideways. One of these three
outcomes will occur... CHANGE is inevitable." But this is "not"
the case. For every trader with a computer program saying buy,
there are 10 other traders with computer programs saying sell.
No matter what you do. No matter what the experts do. No matter
what the computer generated programs do. Markets go through
different stages: accumulation, advance, distribution and
decline.
Prices Will Go Up, Down Or Sideways
One absolute can be taken as gospel: Prices must either go up,
down or sideways. One of these three outcomes will occur...
CHANGE is inevitable.
No advances in technology, no leaps of modern science, no
radical shifts in how we see the markets will ever alter this
fact.
Thus a market timer does not need to predict the future, or even
attempt to predict it. A timer only needs to know the rules of
the game and abide by them. If the market goes up, be long. If
the market goes down, be short or in cash.
And very importantly, if you can react properly to "changes" in
price, you can profit.
Strategy Based On Change
Trend followers are always poised to jump on board the next
unexpected major move in the markets, and to profit from it.
While some people focus on the past results of a trading system
to gauge its success, and others only think about what happened
last month. Both are wrong.
A great trend following system, adapts to, and uses, change. The
"future" is its most important ally.
A good trend following strategy lets profitable positions
continue, while quickly exiting positions that go against you.
Human Nature
There are always fears that trend following may not work in the
future or that the markets have changed and trend following is
not the way to go.
"...if you can react properly to "changes" in price, you can
profit." This fear is strongest after a drawdown or during
unprofitable sideways markets.
Get used to it. They happen!
Then along comes another big move in the markets. Market timers
who follow trends "again" make big profits and everyone's belief
in trend following is restored.
But those who dropped by the wayside are still on the outside
looking in, trying to understand how to generate profits. After
trend followers lock in a nice gain, those who left may even
climb on board and try trend following again.
But human nature is fickle.
If the markets are going sideways and current trading is not
going well, alternatives begin to look better and better.
Untested or insufficiently tested methods may be implemented in
an effort to turn things around. Of course, such acts of
desperation rarely work. Market timers should be suspicious of
the urge to change, made in the midst of a drawdown.
To Be Continued...
"Have The Markets Changed?" will be continued in next weekend's
commentary.