Trading On Predictability & Eventuality

Some of the most common questions I get from the public are;

All these questions demand that I be a fortune-teller, which I obviously am not. For reasons I’d rather not get into, the majority of the public have been under the influence of self-styled gurus, mass/social media and the internet. The impression they get is that the financial market strategy is to get a jump on everyone else if they could find the secret to knowing the future.

Most resort to technical analysis (with lagging indicators) while others look at what the big players are doing (ironically, by reading dated news). Some get so caught up in sales pitches that they actually buy into expensive software and subscriptions thinking that they found the edge that will get them ahead of the pros and even the market itself.

The truth is, if it was so effective, you’d probably not be able to afford it, realistically speaking. If it were so simple, it wouldn’t have the edge anymore because everyone would be using it. It if were that great, there’d be more rich people than those who are losing.

However, there is profitable and simple strategy that keeps your risk low and is more consistent that any indicator, screener or scanner. You only need to use a little common sense to know how you can profit from the market by knowing what habitually moves prices and when these movements usually take place.

PREDICTABILITY 

The market, especially in the US, Europe and Japan, is mostly a seasonal and cyclical creature. There are sectors and industries that move according to changes in weather and seasons such as agriculture, mining, retail apparel and energy. These are reliably seasonal by nature and will (more often than not) trend at certain times of the year every year.

Then there are those that have a cyclical nature as a result of their business cycle, annual events, scheduled news releases or conferences, etc, such as financials, aerospace, transports and construction. These also happen several times a year every year just as the broader market also has its own annual cycle of reliably bullish, bearish and volatile periods. Not all seasonal and cyclical trades go up. In fact, there is quicker money to be made in bearish cycles.

The strategies for such trades can range from weekly executions to fortnightly to monthly to quarterly, depending on your risk appetite/profile.

The reliability of each season and/or cycle can be measured to give the trader a read on the level of risk in that trade. Obviously, the higher the reliability level, the less risky the trade. But that doesn’t mean that low reliability factors are not tradable – there are strategies that can be employed to reap a profit even in low reliability factors.

There are also a host of securities that tend to trend predictably and reliability when certain macroeconomic factors are in place. Such trends tend to be longer term which is great for the medium to long term investors.  

EVENTUALITY

Ever so frequently, good securities with sound fundamentals take the occasional hit. Depending on the circumstance, such events usually don’t kill the security. Having an understanding of macroeconomics will help determine if and when the security is likely to find a bottom and recover from its lows.

This is a very reliable strategy that is low risk, predictable and very manageable in that entries are easy to identify and exits have already been pre-determined. It is a strategy that doesn’t rush you into taking a position hastily and allows you to book profits along the recovery process. 

Of course, one must know the security well and have done all the proper research and planning to ensure the eventual return of the price from whence it fell.

The great news is that such opportunities are frequent and often in the headlines. Thus, you don’t have to go looking high and low for good trades when its right in front of you. The trouble is identifying them and how to turn that information into low risk cash. 

TAKE A CHANCE, MANAGE THE RISK

Obviously, there is no trading/investing without risk. Thus, it is imperative that we measure our risk factors before placing the bet. The good news its that such strategies don’t have to be complicated and stressful. But they do require a high level of discipline, research and planning. Common sense will tell you that nothing good can come from being haphazard and unprepared. The planning also includes contingencies should something unexpected happen. This could be in the form of a derivative hedge, price-to-price hedge, counter-trades and the good old fashion stop/cut loss in worst case scenarios.

These strategies are also affordable with a US$5,000 account with stops that are conservative and controllable. After all, the market will give you what it wants to give you – you have no control over that. However, you have 100% control over what the market can take from you. Thus, keep your losses small and let your profits run.

And that’s how you stay profitable and consistent without the need for sophisticated analyses and unreliable chart-guessing.

Copyright © Pattern Trader™ by Conrad Alvin Lim. All Rights Reserved 

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