In today’s Money Weekend…take the pressure off…trading in the zone…down the rabbit hole…the right questions…and much more…
Despite the mad rally during the week in the US on the back of relief that the Omicron variant isn’t leading to a spike in hospitalisations, I remain wary about the direction of markets over the next month or so.
I’m happy to have taken some profits and dumped a few stocks that were going nowhere fast.
When you lower exposure to the markets, it still means you can participate if the rally continues. But it takes the pressure off, and you can allow markets to do whatever they want without raising a sweat.
If there is a correction, you have some ammo ready to pick up some bargains. If the rally continues, you still have a few positions that will benefit — so you aren’t sitting on the sidelines kicking yourself for getting out.
As a trader, I don’t think there’s a need to be fully invested at all times. As your confidence levels go up and down, your positions should follow along.
There’s no doubt in my mind that your returns aren’t just randomly distributed over time based on the luck of the draw.
Trading in the zone
Instead, there are phases when you are trading in the zone, and others when you are flying blind and hoping for the best.
You have to get in tune with yourself to know when you’re feeling it, and then you have to make as much money as you can while you are shooting the lights out.
Then, when you aren’t feeling it, you have to work it out as quickly as possible and take it easy until you are back in the zone again.
I went to a pool hall for the first time in years last weekend, and thankfully I got in the zone and played some great pool.
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I don’t know if it was the cover band next door playing INXS, the Macallan 12 Year Old with one bit of ice, or the picture of Fast Eddie above the bar, but something clicked, and I knew I was in for a good night during the first game.
My mate didn’t have a win for six games, and I quietly enjoyed his grumbles after missing a sitter. I was in his head.
Your state of mind leads directly to your outcomes, and I reckon playing pool is a great example of that in action.
When your mind is clear and confident, you hit balls smoothly without a thought. When there is a hint of doubt, it jumps onto the pool cue, and you can’t sink a ball sitting over the pocket.
Golf is the same.
Trading lends itself to a sporting analogy because you are constantly making decisions under pressure. The pressure either leads to rash decisions based on panic and fear, or you’re able to stay focused and calm, executing the plan you mapped out from the start.
When you remain aware that the wheels can fall off at any time, you are forever vigilant, ensuring that you remain on the front foot.
Amateurs get themselves into trouble because they either become overconfident after a few wins and tell themselves they can do no wrong, or they become despondent after a few losses and start kamikaze trading to try to get their money back.
Hoping for the best while expecting the worst is the way to go.
Then you aren’t surprised by anything and can take it all in your stride.
Down the rabbit hole
When I have my financial journalist cap on, I’m forced to buy into the constant game of making sweeping statements about why stuff happens and what I reckon will happen next. When, in fact, I think the path to consistent trading profits has nothing to do with worrying about all of that.
Will the default by Evergrande lead to an implosion of the Chinese property market, which will have knock-on effects on the rest of the world?
Is inflation in the US persistent, and will that lead to a sharp spike in yields which will knock the stuffing out of growth?
Will gold rally to US$3,000 at some vague point in the future?
Trying to work out an answer to every question that the market throws at you will lead you so far down the rabbit hole that you’ll never find a way back out.
Why do you think your answers have any connection with ‘the truth’ (if there is one)?
What if you’re completely wrong with your answer? What was the point of working so hard to find the answer if you got it wrong anyway?
Whether you try to deal with the immense complexity of the markets by looking for answers at every turn or not, you will end up at the same place we all end up when we place a trade.
The right questions
Where will I be proven wrong and how much money can I make?
What are the odds of each outcome happening?
What’s the potential upside if everything goes right?
It’s still a difficult task coming up with valid answers to each of those questions, but they are a far simpler set of questions than asking yourself to answer the world’s most pressing macroeconomic problems each and every day.
For Money Weekend
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here