Panic Before Everyone Else Does

Published on November 13, 2008

Panic Before Everyone Else Does

November 13, 2008

Market forecasting is one thing and profiting from it is altogether another thing. OPNewsletter subscribers know how accurate so far my warnings had been and I did panic before everyone else did but did I benefit by opening pure bearish trades? In the hindsight, I could have made a killing but did I? No! Sure it did help me in unloading my bullish positions though.

In spite of having such an accurate forecast I couldn’t reap extra ordinary benefits from it. I thought through this and here is the part of my trading decision making. Bear markets tend to have quick and sharp rallies often ruining short sellers. Though I knew that a sell signal was triggered and I shared with OPN subscribers, I was conservative in relation to not entering the market with full fledged bearish positions. I have been thinking that any good news can move markets violently so not sure “when” will it crash. So I chose to be hedged with slightly bearish positions in stead of trading alongside bears. Results were mediocre at best in such a fast moving market, great for an option trader. Will I do better? I don’t think so for I don’t think I shall again take any large bet in such markets when rally/crash can happen in a jiffy so rather be safe than sorry.

This brings me to an important point about trader’s psychology. A trader, not all, tends to compare the performance with respect to decision not taken in hindsight. If only I had picked up during intraday low of Oct 10th, or I knew markets are oversold and will reverse, etc and I could have made so much. And that’s a dangerous thought. Test yourself in the present moment, see what decision will you make in the current conditions, note it down and refer to it later no matter if you put real money for it or not.

Moving to markets- Times Online reports as much as $100 bln was wiped off the value of hedge fund assets last month as investors rushed to withdraw their capital and the worst markets in living memory blew a giant hole in performance. Investors redeemed about $60 bln of funds in October, while see-sawing market conditions accounted for the remaining $40 bln fall, according to EurekaHedge, the Singapore based industry research firm.

The news is getting gloomier day by day. China’s industrial output grew at a slower pace than any economist forecast in October, stoking concern that the biggest contributor to global growth is running out of steam. Germany is officially in recession. The O.E.C.D. forecast that gross domestic product for its 30 member countries would decline 0.3 percent in 2009 from 2008, before recovering slightly to grow by 1.5 percent in 2010.

The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers. It is the worst possible scenario to have a “bad strategy” and an “excellent execution” and hence it’s fine to change strtaegy. But what kind of signals are we sending to the world? Are these assets so toxic? I guess it’s about the priorities for limited resources. I haven’t yet analyzed the magnitude of announcement, but Mr Market already spoke what it thinks of it (Don’t forget Mr Market is an emotional person). And see what’s happening now? It seems like everyone wants a pie of this bail-out money. Just show them grim picture, compare with great depression and consequences of not saving them, etc. You got what I mean. Confusion is reigning. TED spread rose yesterday, and so is the LIBOR spread.

I shall repeat my latest reading of markets, I think, most likely, markets may NOT hold Oct lows. It might test the 2002 lows and oh BTW, I know even if my forecast is correct, I am not going to reap extraordinary profits from it. That’s my psychology. What’s yours?

Profitable Trading, OP

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