Perhaps the second most frequent question I am asked (right after how do I find a stock) is what do I think the market is going to do. When I answer, I want to avoid rudeness yet the simple fact is that whatever I may think the market is going to do is completely irrelevant at least in the sense that the market simply does not care what I think. If I think it is going up, that doesn't mean it will go up and if I think it will go down, it doesn't mean it will go down. Of course, the phenomenon doesn't apply just to me. It applies across the board. I am fascinated by how often I hear diametrically opposed opinions from various talking heads on the TV stock market shows. Their opinions may make for wonderful entertainment, but they should not be relied upon as trading gospel. It is not unusual for one prognosticator to predict a specific stock is set to move up while 15 minutes later an equally credentialed guru is adamant that it will move in the opposite direction.

Years ago, I remember an exercise on a TV show where a chimpanzee picked stocks against an analyst and actually did marginally better. Is all this to say that success in trading is luck alone? Certainly not. There are a number of principles that can lead to success even when what we may think might happen doesn't. As an example, take the old saw: "the trend is your friend." Anyone who traded based upon that adage and made bearish plays since the latter part of 2007 probably did quite well. Anyone who traded and didn't pay attention to the market direction probably has suffered significant losses.

I am primarily a technical trader so I rely upon what I am seeing the market do. Part of my plan is to try to trade the direction of the market, the sector, and/or the stock. I do not pay as much attention to fundamentals as many investors might since I have learned that simply because it is a good company does not necessarily mean it is a good stock. General Electric (GE) may be a great company, for example, but its stock has fallen from $60 in 2000 to under $7 in March of 2009. I don't mean to suggest that there aren't fundamental reasons for the dive -- there are. What I mean to say is that I can look at a chart of GE and see how it broke below major support (what used to be a floor) back in early 2008 and signalled a time to get out to technical traders. Could I have been wrong? Of course, but if I followed the signal and got out I could always have gotten back in if it broke back up through resistance (the new ceiling).

The point of the last paragraph is that traders and investors need discipline and self-imposed discipline is very difficult without some device to guide us. I use lines on a chart. I don't contend they are perfect because they aren't, but they definitely work better than that little voice in my head that may say hold on a little longer, it will come back.

Predicting is a highly improbable road to success in trading and investing as so many have found out in these difficult times. Discipline, money management, exit strategy, a trading plan, and the acquisition of knowledge are much more likely to lead to success.

Good Trading!
Bill Kraft

March 7, 2009

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