Playing today's stock market

By | May 1, 2012
This post is dedicated to +John Hardy and +Olivio Sarikas .

I've been following the stock charts for several years – to be exact, with data going back to the when the DJIA opened. There are two patterns: the 'normal' market, and the 'crisis' market. It takes a different strategy to play the former market than it does to play the latter market, which most investment consultants won't tell you.

The normal market is where the guidelines that the investment consultants play well in: pick on stability. Pick something that has just started to go up, sit back on your laurel chair, and relax. Limit your losses in case you made a bad choice.

The crisis market is different: pick on volatility. Pick something highly volatile, and trade often. The big, stable stocks fluctuate by up to around 10% on a regular basis, so limiting losses to 8% isn't a smart idea. The smaller stocks fluctuate even more – up to around 30% within a short-term cycle.

So why is the crisis market so markedly different, and where does it come from? The differenve originates in people's nervousness – during times of economic uncertainty, the crisis feeling sets in and changes the market dynamic. Look at what happened during the great depression in the USA: data shows another period where 'crisis market' mentality ruled the day and charts became equally erratic. It will eventually recover, but it's going to take time – more time than a single quarter and more than a single year. Until then, the successful trader's profits lie in short-term trading, and you'll have to get used to the new rules.

Note: I've purposely picked unusual terms, to avoid confusion with standard economic and investment theory.

2 thoughts on “Playing today's stock market

  1. Olivio Sarikas

    +Sophie Wrobel hi there and thank´s for your post. i just found this today, so sry for my late feedback. Your description is absolutely right. so i´m just going to add my view of things. i don´t like the normal market because you really need to know how the game is played and still the winnings are very small. 3-4% with a always luring risk of loosing more than that. The crises market on the other hand is in my opinion very easy and save. you need to know nothing about to market or how stocks work to be able to trade the crisis market. all you need to know is when the crises may have peaked, and you need time. so in a crises market it is no problem to make around 30% in 3-6 months. the rules are simple: a crises is a low-pressure zone of trust, because the crises sucked the trust the people have in their investments from the market. this results in a high loss of most big stocks. since it is a low-pressure zone, the pressure has to get back into it, because trust has to get back to a normal level some day. so stocks will rise – normally in a period of 12-24 months. don´t try to get all of it, just try to get the safe part of it – which is in a time when media says they can´t see a end of the crises yet, although markets have been on the rise for months. in a global crises always bet on ETFs from emerging markets, they take a big hit in a global crises, but they are also the once that have little to loose and are the workforce of earth, so they are the first to get contracts to rebuild. this results in emerging markets being the best deal for crises trading. i would also suggest to buy only "index ETFs" since beating the market is almost impossible. but that is of course only my view on things. 🙂

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