Morning Market Thoughts

Good morning, and welcome to 2018. To say that the gains in the equity markets during 2017 have been impressive is to understate the kind of year we had. The S&P gained 20%, and the Dow Jones Industrial Average gained 25%. This is really historical stuff and it’s been a financial felony to remain on the sidelines. There is no telling what 2018 will bring, but it’s getting off to a good start. The futures in the S&P, Dow Jones Industrial Average and Nasdaq 100 are all up around 0.3%, following strong gains in the Asian markets.

Given that the new tax plan took effect yesterday, there is always the possibility that traders will now be taking the profits that they were unwilling to take last month. So far, that’s not happening and it’s not the kind of theory that you want to rely on for making trading decisions. The smartest traders do not predict what the market will do. Certainly we still see a few of those prognosticators appearing on financial TV or on various well-known financial websites, but they have no real credibility due to their dismal record.

Anyone can assert that the market has topped and will soon undergo a big correction. Heck, I’ll say that. I’ll tell you that this pace is not sustainable and that the big, overdue correction is imminent. I’ll even tell you that we are on the verge of a bear market. And if I just stick with this prediction, I have a 100% chance of being proven correct. As long as I don’t include a time element, I’m never wrong — I’m just early.

Don’t make predictions. Instead, be an observer and take your cues from what the market is doing. Recognize that there are always things to worry about. If it were otherwise, the only wall we’d be talking about it the one along our southern border. Instead, that well is illusory; but the Wall of Worry is real…and constant. If you can learn to operate in an environment of uncertainty, you’re on your way to being a successful trader. Don’t let the Wall of Worry put you on the sidelines. Instead, come up with a few resolutions for 2018 that will serve you well.

Here are a few resolutions you might want to consider:

1. Make no trade that you cannot defend in 5 sentences. If it only takes you one sentence that starts with “I’ve got a hunch…”, you’re not trading. You’re guessing.

2. Decide what your ideal position size is, and then take that position every time…without exception. When you make exceptions, you have no ideal position size — you’re trading on a hunch. If you are going to measure your trading performance, you need consistency in your position size. Your “ideal” position size should include a few different numbers. First, what’s your starting position? Good traders don’t just pile in at one time. They take a pilot position, and then wait for confirmation that they are correct. Then they build on that position until they have reached a full position. They never reach a full position until they have a profit in their trade. They have a cushion. Resolve to trade with a cushion, not a pair of dice. You’ll make more money.

3. Speaking of measuring your trading performance, you will take some time each week, without exception, to take stock of your performance. Review your trades each week and make sure you are on track with your decision-making. Are you consistent in your trading actions, or are you all over the place? Are you guessing?

4. Have specific standards for opening trades. Know what your preferred setup is. And if you can’t find any setups, don’t lower your standards. Instead, patiently wait for them to present themselves. Trust me. They will.

5. Sit on your hands on a regular basis. Just remember that there are two aspects of hand sitting. First, see #4. Also, resolve to avoid micromanaging a profitable trade. Your stock is going up for a reason. Let it do what it’s doing rather than try to predict when it’s done. Sit on those hands and let others push the stock higher. You’ll find that sitting on your hands can be quite profitable.

You’ll have your own resolutions to make for 2018, depending on your current trading habits and performance. Don’t make ten resolutions…make 3. Heck, make one! Just have a plan for 2018 that addresses your own trading behavior. Having a goal for achieving a certain return is a good thing…but it’s a waste of time if you have no plan to get there.

See you in the forum.


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