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Hi,
No apology to reposting (from July 1997) the following:
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I, for one, make no predictions and expect and accept whatever happens.
However, there is still some useful things to be said about big declines.
If you look back at previous major plunges in the DOW you will see that the
fall is normally fairly symmetrical with the previous rise for a reasonable
time (several days, weeks, even in some case months). It is as if the
market is looking in the mirror! The duration of the symmetry appears to
be related to the size of the fall.
So, if history repeats itself, a big rapid fall with few retracements will
have been immediately preceded by a big rapid rise with few corrections.
I am not predicting a fall any time soon - only helping you to identify the
warning signs should they recur.
When the market stops making significant retracements - a "blowoff phase" -
then that, in theory is the time to be short. This is also the time when
it costs the most to be short of the market early - losses mount up quickly
- and is the very time the rewards are both the highest and the fastest in
arriving - the early pain is small compared to the later gain.
To exploit this approach probably takes guts, a willingness to lose a lot
very fast, with many false dawns, and a willingness to under-trade.
If you think about this for a while, each of these skills are rarely found
in one person. To find all in one trader is even rarer, and it is to this
rare breed goes most of the prizes. Guess who pays the prize fund - yes,
normally you and me.
So, if you agree with the analysis, and like me, do not count yourself in
this small band of extremely skilled traders, then why worry about a
possible big fall.
There are do doubt many ways of participating in the game without the early
pain - but that is, as always, another story, probably rarely told.
To effortless trading,
Ric.
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