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Let’s face it, there is absolutely no logic- if we understand logic to be just another word for common sense-in the stock market. So, I ask, how do we make sense of the seemingly random moves in the market? We don’t! Instead we create rules to help us manage the randomness. Then, and only then, can we move from the illogical to the manageable. Let’s take a look at why we need to manage our trading information.
THE NEWS IS WELL…JUST NEWS
Please do not tell me that the market moves based on the news, on what some economist says or predicts, on what the “traders” on the floor of the NYSE say, on an earnings report, on the price of oil, on the overseas markets, on the strength or weakness of the dollar, or on any other number of news related factors. If that were the case then trading would be so easy! If the news is bullish go long, if bearish go short. Take a look at the headlines each day and you will most often find that what supposedly made the market go up today may indeed be the very same reason for the market to go down the next. Look at the last two days in the market (October 29 & 30, 2009): the DOW was up 200 points on the 29th supposedly due to a bullish GDP report, yet on the 30th the market gives it all back due to a bearish economic report. Go figure! Did the traders today forget about yesterday’s report? It is enough to make your head spin out of control and your trading account suffer whiplash! Short term memory loss is rampant on Wall Street. Don’t try to trade it or you won’t remember how to trade.
A CONSENSUS PLEASE
On any given day there seems to be A REASON for the market’s move, whether up, down, or indifferent. It is as if Bob Pisani called a meeting on the floor of the NYSE and then called around the world to all the trading desks seeking a consensus of THE REASON for the day’s market move (+/- 3 points margin of error of course). Have you ever noticed how quickly this so called consensus can change if the market is up 100 points in the morning and then down over 100 in the afternoon? I guess Bob had to hold a second meeting!?! Nothing against Bob since it is his job to make sense of the market. There is no such thing as a consensus, just the final numbers at the end of the day. All that matters is the current price.
EARNINGS WILL GIVE US THE ANSWER!
Yeah right! Take for example some resent earnings reports from AAPL, AMZN, and GS, all of which beat the street and were considered bullish, so all three went straight up right? Wrong! AMZN went crazy, surging 30 some odd points in two days, while GS and AAPL have sold off hard. Makes a lot of sense does it not? You never know how an earnings report will be interpreted or traded, so why try to guess? There is no logic behind it, so why beat yourself up over it? Just do not trade through earnings and do not trade the day of earnings. Wait and let the market tell you what to do with the news based on your own rules, not some interpretation of the news. Most of the time my CROSSHAIR will not even give me a trade entry for several days to weeks after an earnings report so why look for one? So what! There are other potential trades out there.
CONCLUSION
The market only gives us two rules to follow: know when and why to buy and know when and why to sell. Every successful trader has his or her own rules for entry and exit based on the need to make sense of the market. I have mine and hopefully you have yours.
Think about it this way: does it really make sense that a 900000 lb 747 can take off and fly like a 1 lb bird? Do you really understand how the internet works? Or a fax machine? How about a light bulb? None of these may make sense and you may not understand each of them but I am willing to bet that you have good reasons to fly, use the internet, send a fax, and flip a switch. So why make trading any different? You may not understand the market and it may not make any sense but that should not keep you from entering and exiting this same market-AS LONG AS YOU HAVE A REASON TO DO SO!
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