Don't Sweat the Market -- It's Your Own Trading That Counts
By Gary B. Smith
Special to TheStreet.com
10/20/99 12:25 AM ET
Troubled by the market? Afraid of a big crash? Worried we'll sink back to single digits on the Dow?
Well, here's the deal: Forget about the market. Wipe it out of your mind. That's right, the market should be of no concern to you.
Let me say that again. The market should be of no concern to you.
So, what should concern you? You. Yourself. Your own trading. That's what should concern you right now.
That's right. In an ironic twist, the actions of the market should have zero impact on what you're doing right now. Zero. Let me explain.
The way I see it, you obviously can't control what the market does. You can't even control what an individual stock does. Oh, maybe if you're sitting there flush with a few million dollars, you can prop up some dog for a while, but eventually, if the stock wants to go down, it will go down.
So if you can't control what the market does, can you forecast what it's going to do? Well, you'd expect me, as a contrail-reading technician, to say yes.
But the answer is no. Oh sure, I might be able to lay odds on what direction the market might take, but an ironclad forecast? Ha! If I'm lucky, maybe I'm good enough to place the odds 60% in my favor. Certainly nothing more. (And that applies, by the way, to any market guru, service, prognosticator, pundit or sage you can come up with. The facts are, no one knows what the market is going to do.)
So, we can't control the market. And we can't forecast its next move. So where does that leave us? What can we control?
Well, I gave you the answer already: YOU!
So, in that regard, let me dole out some advice, some rationale and some things to think about.
As I see it, if you're a trader, you can be in only one of four possible camps.
Camp 1: You have no method, but you've been doing very well lately.
My advice: Brother, you are either an idiot savant trader or the luckiest person alive, because if you've been winging it and coming up with all aces, you will get annihilated. Maybe not now, but eventually. In the meantime, buy a lottery ticket for me!
Camp 2: You have no method, and you've been taking your lumps.
My advice: Stop. Whatever you're doing right now, just stop. Think about what you're trying to accomplish and come up with a plan. A plan that can work not just when the market is rosy, but when the market stinks. Maybe your plan is buy and hold Cisco (CSCO:Nasdaq) for 20 years. Great. It's a start and certainly better than flushing money down the toilet, which is what you're doing now.
Camp 3: You have a method, and you're still taking your lumps.
OK, two things to think about. No. 1 is drawdown. By that I mean, in all your tests and trading, what is the normal percentage you expect your equity to dip?
The answer, by the way, is not zero. There is no method that has a 0% drawdown. At least, no method I know of. That's equivalent to never having a losing day or week.
No, you should have at least some inkling of how big a hit each year you might take. Maybe the answer is 10%. Maybe the answer is 2%. Therefore the real question is, are you down more than your expected drawdown?
Advice: If the answer is no, then skip down to Camp 4. But, if your answer is yes, then know this: The market last week had its worst week since 1989!
Hey, I have a method. And I've tested it. And I took some hits. But in light of the market being pummeled more than it has been in the past 10 years, I did OK. Or let's just say, within tolerable limits.
So even if your drawdown was more than you expected, remember, we had a once-in-a-decade event. But maybe that continues. The key, therefore, is to look at your trading and say, "Hmm, I underestimated either how much stress my method could handle or how much stress I could handle!" If that's the case, go back to Camp 2 and stop. Reevaluate, fine-tune and come back when you have your confidence back.
But hopefully, you're ready for whatever the market is prepared to give you. In that case, remember, remember and remember again: Drawdowns are part of any method or system. So if you had one this past week, join the crowd. Losing money is not fun. But it's expected.
Camp 4: You have a method, and you're doing fine. Heck, maybe last week was a great one for you.
Advice: Life is beautiful, isn't it? And I applaud you, sir or madam. Just don't get cocky because the market has a tendency to lure all of us into a sense of omnipotence. Usually right before we get crushed.
Instead, continue to analyze your own trading, and ponder whether you really are good ... or lucky. Of course, a little of both is always nice.
OK, that's all for now. Remember, if it's you against the market, that's a battle you can't win. But if you subscribe to my thinking, it's one you shouldn't even be fighting.
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