It was the legendary trader Jesse Livermore who said, “There is only one side of the market and it is not the bull side or the bear side, but the right side.” In other words, Mr. Livermore was not picking sides or teams when it came to trading. Too often traders and investors have this bias about the stock market and fail to capitalize on the opportunities that the stock market gives us every trading day.
A couple of years ago I read an article about Michael Burry. He was a hedge fund manager from 2000 – 2008. He made his fame and fortune by betting against subprime mortgages. What I found so interesting was that he said he rarely shorted stocks and most other equities, he usually bought stocks most of the time. But when he saw the opportunity to bet against subprime mortgages, he took the bet. You see, he took what the market was offering, he didn’t force his will on the stock market. When the stock market told him that it was ready to break or fall, he simply started to load up on the short side trades.
Something else I find traders and investors doing wrong is that they often look to get even with a stock after taking a loss in the equity. In other words, if they have lost money in a particular trade they try and get revenge on that stock. If there is any lesson to take from this article, it is to not take trading personally. The market is always right, until it isn’t. Remember, the CEO of a company does not know who is trading in their equity. Do not take stocks personally. Just trade every stock the in same manner by using charts and patterns.
Another mistake that many traders make is that they fall in love with particular stocks. In 2012, many traders were in love with Apple Inc. (AAPL). The stock was being upgraded every day by countless major firms. Individual traders and investors would talk about the next great iPhone release like it was curing cancer. The truth is, at that time there was smart phone saturation taking place in the market and the stock was under slow institutional distribution. As you all know, Apple Inc. stock topped out just above $700 a share and dropped by more than 200 points in four months – a call which we traded for profit. The current Apple chart looks more like Cisco Systems (CSCO) and Intel Corp. (INTC) from the 2000 top these days. In other words, the stock market knows that the company can no longer achieve the growth it once had. Every stock goes through this cycle, it is not just Apple Inc. The point here is to not fall in love with a stock or company — stocks are for trading, not marrying.
The moral of the story is to not force your will on the market, just take what it gives you. Every trading day the stock market will give us opportunities. If the charts tell us the level looks good for a trade, we take it. If the chart does not tell us that the level is solid, then we leave it alone. Trading is all about buying major support and selling major resistance. The minor support/resistance levels should be left for the amateurs. This does not mean that we will win on every trade, but it does allow us to have the odds in our favor, and that is really all a trader can ask for.