Mr Market wrong footed me this week. For a while now I’ve been watching the Commonwealth Bank of Australia [ASX:CBA] share price creep higher.
Quite a few of the fundamental types keep saying it’s overpriced and due to be cut down. One of the investment banks put a price target of $72 on it.
As it went higher, and got closer to the earnings announcement, it occurred to me: was there a short trade here?
The idea was that Commonwealth Bank’s results would disappoint the market and it would drop from its lofty perch on the day.
There didn’t seem much upside that could be left, and therefore not likely to burn me by going too much higher. (A stock rising is bad news when you’re short.)
Two things stopped me. One was the notion that Commonwealth Bank would pay a special dividend. I assumed that was why the market was crowding into the stock.
I don’t want to stand in front of a freight train when every retiree’s favourite income stock might pay out more.
The second is that I’m reluctant to go short on a stock where the overall dynamic is not that bad.
The other three Big Four bank stocks are creeping higher and housing is heating up again. The payoff just didn’t seem very compelling.
Sometimes it’s better to do nothing in the market unless you have total conviction. I killed the fleeting idea of going short on CBA.
And thank goodness for that! She really jumped yesterday after releasing her results.
Mr Market: up to his usual tricks again of defying expectations!
It points again to what I told you yesterday: bank lending is going to inflate the Aussie property market higher.
Navigating the market is never easy. In fact, I got an email from a colleague the other day.
He was all lathered up, whining about his losing trade. I didn’t say much. One needs to show tact in that kind of situation.
But it got me thinking…
Markets are a source of anxiety and stress for so many.
They read all the analysis, absorb lots of information, read all the trading books, and become exasperated by the chaotic and difficult nature of the stock market.
I decided to tap the shoulder of my colleague Terence, a trader, whom you’ve been hearing from lately, for his take on it all.
I asked him…
‘What’s is the biggest obstacle in trading markets?’
This is what he had to say. Some of it may surprise you!
Over to Terence…
‘Yes, one can read all the trading books out there. And they all make sense. Make it look so easy.
Then they go ahead and trade.
They lose money.
And lose it fast.
Or, if they make some money, they soon give it all back.
That’s a common occurrence.
What’s the problem? What goes wrong?
There’s something all the trading books leave out.
Sure, they can teach you trading techniques.
But there’s more to trading than that.
By way of example, one could look at paper trading. Now, for someone completely new to markets, I say paper trading is OK, up to a point.
But don’t kid yourself. It’s only when there’s real money on the line that you get to find out a few things.
To know your biggest obstacle in markets, simply look in the mirror.
This is the case, for most people anyway.
Your greatest obstacle is yourself.
Usually it’s your own limiting subconscious beliefs, often about self-worth.
Think of the common occurrence for traders to let good profits slip through their fingers.
I think maybe, deep down at an unconscious level, they don’t feel worthy to receive.
To grow your net worth, you first need to grow your self-worth.
Few, if any, make this connection.
Now, I’m not a psychologist, so how can I be so sure about all this?
Because I’ve lived it.
I started out trying to learn everything about markets.
But I ended up learning more about myself.
To make money, you have to do this kind of work. Often it means uprooting belief systems that hold you back.
That’s the real work.
It’s the hardest work you’ll ever do.
And why so few do it.
But I say, until you do that, it doesn’t matter how many trading books you read. You will find a way to self-destruct.
Look at the life of legendary trader Jesse Livermore. That story deserved a better ending. So sad.
Livermore clearly had issues surrounding self-worth (he killed himself).
The market gives you ample opportunity to crash and burn.
It’s what you bring to the market. Your psychology, mindset, call it what you will. That is key.
No one sets out to self-sabotage. All this goes on in the murky regions of the subconscious. My advice is to read books about that. Maybe even have some counselling.
Another common experience, I find, is that traders will make a run of profits and then give it all back.
Now, I have a technique to stop this. A personal stop-loss, so to speak…
If you have a good run of profits and find you then have two or three losing trades in a row, stop trading.
Take a break from markets.
Come back refreshed. Then place a small trade. If it runs against you, repeat.
Stop trading, take a break.
When you can put two or three good trades together, then you can sort of run with it. Press your luck a bit.
I got that gem of wisdom from an old trading book I read.
And it makes sense.
There are times in your life when things are just not clicking for you.
Think of that expression, ‘things happen in threes.’
There are times you just shouldn’t be trading.
And lastly, keep a sense of perspective on it all. There’s a world outside. Health and family dwarf the importance of my trading account.
Always remember that.’
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