Interesting events lit up the news wires at breakfast time Monday…
Despite China’s best efforts to prevent it, the Shanghai stock market tanked again overnight Sunday. 8.4% down on the day. 345 points lost. And the second biggest crash in its history!
Rumour has it the Chinese government is under pressure to scale-back their market interventions. The IMF has been on their case and they want to see a little less artificial pumping-up of stock prices. Is this really the reason things went south? Who knows?
But even with all the state-sponsored buying pressure, it does go to show there is still no way of telling exactly what’ll happen next in the markets.
Ask the thousands of Chinese housewives and taxi drivers who’ve been swept up in the stock market fever. I bet they are still spinning around in shock, not fully understanding that it’s normal for markets to move down as well as up!
And sadly, I bet many of them will be watching their entire lifesavings evaporate in a single margin-call from their broker too.
So there’ll be a few Chinamen licking their wounds, for sure.
And to be fair, they probably had no way of knowing better. They would have been toeing the official line…
If the Chinese government is prepared to arrest traders involving in short-selling, can you imagine the propaganda it is spinning out encouraging people to buy?
So yes, being under prepared in the markets is bad. But what about the other side of the coin – can you ever be over prepared?
I think you can. And in terms of the potential damage it can do to your account, it can be even deadlier still. Here’s why…
When over prepared is worse than under prepared.
When you are over prepared you run the risk of ‘marrying’ your opinion. It’s easy to become blinkered to any other possibility but the one you envisage.
You may analyse the markets yourself, or you might invest in the picture put forward by a market commentator.
And at a specific moment in time it might all make perfect sense. The logic is there and it shines dazzlingly bright.
But don’t discount how painful it can be to shred your hours of hard work, or write-off the money you invested in third-party analysis when the picture shifts.
The markets are organic beasts. And things change quickly.
So instead of shooting yourself in the foot, continuing to buy JPYUSD on every dip just because it seemed a great idea three weeks ago, despite the market having since developed into a raging downtrend, you need to take a more flexible stance.
(That JPYUSD situation is a purely theoretical example by the way, not a comment on the current market!)
The ideal middle-ground is not under prepared, not over prepared, but present in the moment and ready to react to whatever comes next.
Be coiled like a spring, with a feather-light touch
All this talk of China, Japan, and flexible stances… It’s making me think of martial arts.
So check out this quote from Bruce Lee. It illustrates perfectly how to position yourself:
Empty your mind, be formless. Shapeless, like water. If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend.
He talks about preparing to physically fight, but he could just as well be putting a comforting arm around the trader buying those USDJPY dips…
His sage advice steers the trader back on track: flow like water, don’t fight the market with a narrow opinion.
Anyway, it all ultimately leads back to the three truths of trading and the readiness to take responsibility for your own actions.
You might have heard me mention the three truths before, but they really are the essential foundations for a healthy trading outlook:
The 3 Simple Truths of Trading
1) You don’t need to know what will happen next to make money.
2) You will experience a random pattern of winning and losing trades.
3) Profit is made simply by gaining more money on your winning trades than you give back on losing trades.
At a high level, there is little more you need to know in order to trade well. Everything else that comes after – the buying and selling signals, the position sizing, the software and indicators – they are all just tactics that support these three rules.
For example: the Chinese stock-jobber wouldn’t have gone all-in if he’d known the three truths of trading. He’d be expecting a random pattern of wins and losses instead.
The scary 354-point plunge would just have meant a losing trade in line with expectations. His risk management would have prevented life-crippling exposure to the event.
And the JPYUSD dip-buyer might have taken a more enlightened outlook…
Despite his bias, he’d be aware that he doesn’t need to know what’ll happen next in order to make money. He’d know to flow like water as the market changes. And if he’d really taken Bruce Lee’s advice on board he’d now be selling into that theoretical market’s downtrend instead of buying!
So if you really want to find the ideal middle ground – the flexible stance – my advice is to take the three truths of trading on board. I mean REALLY take them on board.
Forget how deceptively simple they appear. You’d be surprised how many losing trading campaigns can easily be avoided by honestly applying these three simple statements as a filter.
So make them your own. Ask yourself if you are operating outside the three truths even as we speak. And if you are, make the necessary changes immediately. It’s the sure way to put you on the road to consistent profits as soon as humanly possible.
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 29th July
15:00 USD Pending Home Sales
19:00 USD FOMC Statement
19:00 USD Fed Interest Rate Decision
Thursday 30th July
08:55 EUR German Unemployment Change
13:30 USD Gross Domestic Product
Friday 31st July
10:00 EUR Consumer Price Index
Monday 3rd August
08:55 EUR German Manufacturing PMI
09:30 GBP Manufacturing PMI
15:00 USD ISM Manufacturing
Tuesday 4th August
09:30 GBP Construction PMI
We’ve another quiet week ahead on the reports front, but do keep a particular eye on US-fed stuff Wednesday evening.
I do hope you enjoyed this week’s eletter and it has you flowing like water during your own trades!
Until next time, happy trading…
