Tag Archives: loss

The Next Stock Market Collapse: Are we There Yet?

April 3, 2016

It seems that we are entering a decisive period for the stock market. The S&P 500 is right at the top of a channel between 2,100 and 1,920. Although I don’t like technical analysis, it is pretty clear that if it rises significantly about 2,100, then a new bull market will start. Conversely, if it drops below 1,920 a major market crash may follow.

S&P 500 10 Year Chart

S&P 500 10 Year Chart

Although anyone with limited knowledge of technical analysis would come to the same conclusion, I imagine 100,000,000 would-be retirees don’t look at this chart. And even if they did, they would not be able to see its importance.

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Contempt of Customer

Recently I ordered from an up-and-coming online food delivery service. It was the first time using their service, and although doubtful about their value prop, I thought “Let’s see how it goes.”

Well, to put is nicely, the food sucked. It was cold and unappealing.

I contacted their customer service and expected a prompt refund and a note saying, “Sorry you didn’t like it. Please give us another chance.”

But no. They said, “No, you can’t have a refund.” So they would rather have my $26 than a happy customer.

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Why Emotionless Investing Doesn’t Work

Flickr--Creative Commons

Flickr–Creative Commons

The whole philosophy of using machine learning and artificial intelligence in investing is that machines can make trades quickly and without being burdened by emotions.

It’s the last bit that I’ll talk about today. Emotions — like fear and greed — skew the decision-making processes of the investor, causing him or her to but too high or sell to low based purely on feelings. A good example: you would probably pay more for food if you’re hungry than if you just had a big dinner.

Therefore — and this conclusion is inescapable — machines that do not have emotions can trade better.

Except, this logic is totally wrong. Well, not wrong. But it forgets the most important variable. The market and the economy runs on emotions. Even if every investor was an emotion-less cyborg, the rest of the economy, which underlies all stocks and commodities, runs on desires and emotions.

A successful investment system can not possibly rule out emotions. In fact, the most successful investment system would totally understand emotions, but not ruled by them. This system would understand how desire for something quickly turns to the desire to not lose something — fear. Likewise, it would be able to sense when the momentum of fear turns into a buying opportunity. It could sense that the greed in the real estate market was becoming too frothy, or that the fear of a recession was starting to bottom out.

In short, the best investment system understands emotions. It just isn’t ruled by them.

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How to Never, Ever Lose a Trade

Most people will tell you that there’s no way to guarantee a winning trade.

Heck, most people can’t guarantee that you’ll win 50 percent of your trade.

I can

There are at least three ways to insure that every trade or investment you make is a winning one.

Treat Each Trade as a Lesson

Even if you lose money on a trade, that doesn’t mean that you lost. You can learn from each trade–even losing ones.

Each trade that loses you money may be teaching you a vital clue about your investment theories, or systems. If that’s true, that s0-called, “losing,” trade is invaluable. You may lose a little now… but reap great rewards later.

In a game of chess, this is like sacrificing a piece to move your opponent into check.

Losing Some Beats Losing It All

People hate to lose more than they love to win, but that doesn’t stop them from making stupid decisions. One decision is not to set a stop-loss — either mechanically, or mentally — for their trades. The result is they follow some really bad investments right into the gutter.

If you lose 3 percent, that’s actually a win compared to losing 10 percent, or 50 percent, or 100 percent.

Trading Discipline 

Despite losing financially, a losing trade may end up as a victory if you follow your trading discipline.

This discipline will pay off later with lower losses and higher gains.

Timing

There is no end point in trading. (Well, maybe when you die, I guess.) As long as you save some money, you have a chance to recover your losses and seize gains. Ultimately, learning how to correct your attitude about losing is the greatest win a trader can have.

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Automated Trading and Economic Recovery

Some people think that the economic turmoil is just beginning. Others think that the worst is behind us, the government stimulus worked, and we are on the way to recovery. No one can predict with certainty which way the economy goes, but we need to prepare ourselves to succeed financially, regardless of what happens.

How can we do that?

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Automated Trading and the Risk of Catastrophic Loss

Automated Trading systems have some big advantages over other investments: they require little time to maintain, they can be less volatile than buy-and-hold strategies, and can even provide high rates of return. That makes some people think that they are a silver bullet for investing.

We think that they are great, and they have one risk that some other investments don’t have. That is the risk of catastrophic loss, or losing all the money in the account. Because once the money is gone, it’s over.

Why don’t some investments have this risk?

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