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CNBC published an article near closing on Friday. It’s titled, “The Violent Market Sell-Off Was Easy to Spot and a Long Time Coming.” In the article, they list a variety of reasons why they were able to predict the drop. When I read the article, I shook my head in disbelief. CNBC had been pumping out “market rally” and “market imminent drop” articles for months on end. Every week you’ll have articles for both. And of course, when it happens, they try to take credit for the “prediction”. Naturally, Twitter folks responded by slamming them for taking credit where it was not earned. But despite the rhetoric on both sides, I wish to say good job to those who made money – I know they’ve waited a long time with great patience. And to those who lost money (like myself), I think there are some important lessons to be learned.
Lesson #1: Ignore the News Media
And not just mainstream news media – all of them. If there is something that I’ve learned over the years is this: investigative journalists are experts at everything. If you didn’t catch the hint, I am saying that they are mediocre at everything and experts in nothing. They also lie regularly but disguise it under the catch-all phrase of, “We’re just reporting what was happening at the time.” As a result, they escape being held to account for misinformation. There have even been past controversies surrounding financial news anchors because they gave financial advice but they themselves don’t even trade! Just ignore them all.
Lesson #2: Financial Market Pain = Poor Money & Risk Management Skills
This applies to everyone on either side of the market and not just people who felt pain from the recent drop. Whenever you feel the pain of financial loss, it means whatever you’re doing is wrong. That’s it. There’s no excuse. It’s not because the FISA memo was declassified and released revealing corruption between the intelligence community, the previous Obama Administration, and the news media. It’s because your money and risk management skills are simply not up-to-par. Sadly, that includes me. Think of it this way: there’s someone out there who’s fine and making money which means they are doing something right! But if you are experiencing pain, then it’s the market’s way of telling you that you need to change something.
Lesson #3: Price Respects Support & Resistance (S/R) Zones
By “respect” I simply mean that price pauses at those levels. It doesn’t mean I know how long they will stay there and it doesn’t mean I know the direction that price will continue in. All that we can say for certain is that price has a tendency to pause at those zones. And we’ve seen it this week and we’ll probably see it next week as well.
Lesson #4: Keep Your Positions Small
I keep breaking my own rule of keeping my positions small and it cost me. Hopefully, I’ll learn this lesson this time around. Yes, it’s good when you have enormous paper profits. But just remember that the sizing you have will also determine the scale of the pain you will endure when the market goes against you. Smaller positions result in smaller profits but also results in less pain. If the saying, “You can die by a thousand cuts” is true, then the inverse is also true: you can win with many small and varied positions.
Lesson #5: Take Profit
This is perhaps the most important one for me. I thought I learned this lesson months ago but clearly I haven’t. Don’t misunderstand – just because I lost money this week doesn’t mean I wasn’t doing well. In fact, my paper profits were at an all time high for the last few weeks. The only problem was this: I didn’t lock in my profits! Historically, my stocks perform worse than my option premium writing. I think one of the key reasons for this is because for the option writing, I’m forced to take profit by expiration (or before expiration). I have no choice! But for stocks, I can hold onto it for a long time. In my mind, the stocks are always faced with, “Not yet, not yet, just a little more.” But every single time when the market goes against me, I look at my numbers for stocks and realise that I would’ve been ok if I had just taken the profits! Why didn’t I take profit? I was hoping for more. Hope and greed, the bane of my existence. Don’t be like me. Take your profit!