Explanation: Being a bear while everyone else is bullish is one of the most challenging propositions in investing. For instance, ‘Short selling is an incredibly lonely proposition,’ billionaire hedge fund manager Bill Ackman says. Yet, it can pay off big time if you get your TIMING right. However, since most people, even professional investors are terrified of shorting, I will introduce a quick series about short selling, proper risk management when short selling and the best way to maximize returns. This was to be a part of my never finished book (no time to finish it)…….
For the purposes of this book, we can apply the following tools or shortcuts.
Know What Time Frames You Are Working With and/or Trading:
If you are day trader, chances are, you are trading based on weekly, daily, hourly and minute charts. If you are more interested in catching larger moves, as I am, it is highly probable that you are trading based on both the long-term and short-term charts. Whatever your situation might be, the first step is to define, without a shadow of a doubt, what it is that you are trading.
In other words, if you are day trading based on your daily charts, stick to that. If you are trading based on weekly or monthly moves, continue on with that approach. Do not move between various time frames until and unless the move is permanent. Why? It is highly probable that constant shifting between different time frames will lead to multiple errors and substantial losses.
Identify The Cyclical Composition Within Your Time Frame:
Attempt to identify exactly where you are in the above mentioned cycle. Bottom, bull, top or bear. Typically, the longer the time frame you are working with the easier it is to identify exactly what part of the cycle is working in the market at the time. If you are working with short term cycles, simply understand that multiple short-term cycles will complete themselves within the confines of longer cycles. For example, one long-term completed cycle on the Dow would be a bull/bear market of 2002-2009. Yet, it was within the confines is this larger cycle that multiple short-term bull/bear moves developed at the same time. In fact, a day trader might see as many as 4-5 small daily cycles develop on a daily chart.
Identify Where In The Cycle You Are (bull or bear).
Based on the time frames you working with, determine exactly where in the cycle you are. For instance, if you are working with weekly and monthly charts, identify if the weekly/monthly cycle is in a bull or bear market and/or distributing/consolidating.
Apply Other Time Frames For Confirmation:
Consider other time frames before deciding where in the cycle you are. For instance, if you are trading based on daily charts it would be helpful to consider what weekly and monthly charts are indicating. While the market might be in a 5 day bull run or a bounce, weekly and monthly charts might suggest you are in the midst of a bear market.
Doing all of the above should give a you fairly good indication of where in the cycle you are coming in. Allowing you to take an appropriate trading position in the process.
For example, today’s (September 16th, 2014) market environment presents us with a perfect analysis opportunity for the Dow Jones. Here is a sample analysis to show you how to determine exactly where in the cycle we are and what positions or entry points are optimal.
To be continued……
It’s Hard To Be A Bear When Everyone Is Bullish. Part 9 Google