Don't Be A Fool

As we approach the end of the year it seems like as good of time as any to review some basic truths about stock trading.

One basic truth is that no one, no matter how smart or experienced, knows what will happen in the future. The best that can be achieved by anyone is a proper understanding of probabilities and proper action based on current probabilities.

Jesse Livermore once noted:

There arc times when one should speculate, and just as surely there are times when one should not speculate. There is a very true adage: "You can beat a horse race, but you can't beat the races." So it is with market operations. There are times when money can be made investing and speculating in stocks, but money cannot consistently be made trading every day or every week during the year. Only the foolhardy will try it. It just is not in the cards and cannot be done.

This is concisely put. In certain market environments probabilities offer better than random tradable advantages and money can be extracted from the market consistently and quite profitably by those who can read the advantages and who use proper risk management tactics.

In other market environments, however, there simply are no tradable advantages and probabilities promise nothing more than random price action. In random trading environments losses are almost guaranteed to occur because trade set ups tend to fail in choppy, random markets.

The current market environment is trendless. In a trendless environment trade set ups will just not behave the same way they will in a trending environment.

It would seem intuitive to look for ranging stocks and play the range in this type of environment, but the problem is, past performance is just not a predictor of future probability in a trendless market, so even ranges tend to be unreliable.

The solution to this problem is discipline. Heed the warning that traders like Livermore offer: " money cannot consistently be made trading every day or every week during the year. Only the foolhardy will try it." Stay sidelined when there are no advantages.

A trend will eventually emerge again and when it does, you will be able to take advantage of it only if you didn't drain your trading account trying to be in the market each and every day.