The Need for a Good Plan
Not having a clear plan, and in the case of real money investing, a good plan, is a lot like driving a car on the highway without any real instruction on how to drive. This is not something that is really all that intuitive, and while pros can develop some good intuitive skills over time, beginners or any unproven investor or trader has no business making intuitive judgements.
Even intuitive traders and investors use their intuition in conjunction with a clear set of trading rules, and doing all of this purely by feel, by the seat of your pants, is a prescription for trouble eventually.
The lack of a good plan is a big issue with investors generally, and these are the folks who just look to ride the waves when things go up but become quickly lost when things go against them. We could of course just hold on when trouble like this surfaces, but that’s neither the best approach most of the time nor does it involve us applying any real skills in managing our investments. It is essentially managing by choosing not to manage.
While it is important to gain experience with placing trades prior to placing real ones, it is not enough or even that meaningful to do so off the cuff for any length of time really, without looking to devise a working plan with objectives and rules. The goal is to figure out what things tend to work and which do not, and then construct rules around this to use in further trades.
Since it is really about being long when the long side is more promising than the short side, and be on the short side or be out when it is more likely to do down than up in a meaningful way during our time horizon, coming up with a way to determine all this is the focus.
Our investing plan will look to be on the side of probability more often than not, and as we refine our plan and become better at knowing which side of things we should be on, we will see both our skills, and in time, our results improve.
Obtaining an Investing Education
We therefore need an education to qualify as being worthy of taking the reigns of our portfolios and look to put our money to work and seek to achieve more than a passive style of investing, such as buying and holding a fund, would produce.
As individual traders with small to modest sized portfolios, we enjoy some big advantages over how funds must operate, and one of the big ones is our ability to act in a much more responsive way to changing market conditions. Individuals can close their positions on a dime, and in a matter of seconds you can close everything out and reverse direction.
It is not even the speed that is the advantage here, it’s the not having directives such as having to stay long regardless of what happens, and funds cannot even flee to cash or other types of investments such as bonds or precious metals in times of trouble, as they are required to stay the course by way of a combination of regulation and sticking to the fund’s objectives.
If we become proficient enough, we can leverage these advantages to achieve much better returns over the long term than a fund could even dream of, but all of this does require that we do become proficient enough, as we can screw things up if we are not careful.
A lot of these required skills will come from actually engaging ourselves in markets, seeking out a strategic view of what has worked in the past well and therefore what may be expected to work in the future, although the future does not always mirror the past and we need to be careful not to look to optimize too much either.
It is more important to gain more general principles and insights, such as things as what a bull, bear, and flat market look like, to understand what these reversal points look like and why certain indicators work and why some do not, to better prepare us with the theoretical understanding that will serve us well as markets evolve and change.
Indicators can be very useful, as a way of quantifying price movements and looking to discover pivot areas where things are more likely to reverse direction. That’s really what indicators do, and all they really do, but this is an important function indeed, and the sole one that we will be basing our decisions on when using technical analysis.
Learning to Simplify
It can indeed be more complicated than this but the goal needs to be to strive for simplicity when managing our positions, and the more clear cut our decisions can be made for us, the better. Simple technical analysis can achieve this, where we can even come up with a cut and dried rule such as an indicator showing bullish or bearish, which we can then use to guide all of our decisions.
This is the main benefit by far for investors to rely on technical analysis over fundamental analysis in looking to manage their portfolios. Fundamental analysis is much more complex and requires much more knowledge to master. We can also say that it is unlikely for us to achieve insights that is that much superior to the views of the market that we can establish a real advantage, because people already price in what is known more widely about fundamentals and we’re going to have to be very sharp indeed to beat the experts at their own game.
The biggest reason though why technical analysis is superior to fundamental analysis is that technical analysis is much more dynamic, and completely so actually, as it adjusts based upon present conditions. Fundamental analysis is much more forward looking, but this brings in a lot of uncertainty, and aside from being difficult to do well and the complexities involved in doing it well, it does not manage the present that well or even focus on it very much.
This is all well beyond the realm of individual investors though, unless they are willing to guess, and fundamental analysis does involve quite a bit of guessing even among the most skilled practitioners, and much more so with the much less initiated.
A good comparison would be to look at the stock market in 2018 and come up with a number of predictions about the future using fundamentals, which may or may not come true, as opposed to just looking at the market and seeing on a chart that it is still going up and determining that therefore it’s good to stay long right now.
When things turn, we can also see all of this unfold on charts, where the fundamental analysts will still be churning out their educated guesses about the future, which is really what fundamental analysis is, looking to determine things like prices going up based upon either unrealized value now or the prospects of increased future value.
Whatever ends up happening, whether undervalued assets will become valued more, or how anything may change in the future, will all be mapped out on charts for us to all see. Unlike with some things, like for instance getting in on the ground floor of emerging industries, it’s not even a good idea to look to be ahead of the market, as this introduces a lot of needless risk, when we can just wait for the tide to build and be more certain of our actions instead.
What Investors Need to Do to Learn Properly
Investing offers the potential for much more limited practice placing trades, either on a simulator or in a real account, since the duration of investing involves a lot less decision making and turning points than shorter term trading does.
It still would be worthwhile for budding investors to practice on shorter term frames, where more decisions are being made on a simulator, to develop one’s forward looking skills. Markets are for the most part fractal, meaning that they behave in a similar fashion with 1 minute bars as they do with 1 month bars, although the longer terms tend to be easier to trade with less frequent decisions.
When training though, we want these decisions, so this is one way that investors can look to accelerate their learning curves by getting more practice in as far as how to manage positions well.
We should also look to at least achieve a basic education on technical analysis, although as far as books or videos go, most of the material out there is of limited practical use, and we might think that these people know more than we do but we may take some good ideas from them but also don’t want then guiding us too much.
Things like chart patterns and the like are of limited value and we want to instead seek out plans that can be used in any environment in any market, as we certainly don’t want to be sitting back for years waiting for this certain pattern to develop and sit on our hands in the mean time.
The best way to learn is to look at past price action and seek out ways to take advantage of it well, and as we become good at this, we will discover that timing markets isn’t really that difficult of a task and we should be able to come up with some approaches and ideas that will do considerably better than the buy and hold approach, which can only sit idly by and do nothing but hope.
We have shown that even the simplest of ideas, things just using moving averages where you stay on the right side of them, can beat the market quite significantly, and these approaches also offer the benefit of being very simple and easy to manage and execute.
As long as we are dedicated to learning to become a good investor, which means our achieving and leveraging actual skills in determining the direction of markets, we are putting ourselves in a good position to actually beat them.