Individual investors have advantage | stockbee


Individual investors have advantage

With the market still in correction mode, probability of fresh breakouts leading to rally decreases. When market is in rally mode, you can buy 5 breakouts and 4 will work, but once market turns a breakout has higher probability of resulting in to congestion or reversal. The grater risk in weak market is, if you hold multiple positions, you wake up one day to find all of them have reversed and by the time you get out you would be down 15 to 20%.

The systems like Double Trouble, IBD 200, Episodic Pivots, Virgins are built to take advantage of the momentum phase in market. The Market Monitor is an overall filter on top of these methods. When the Market Monitor is in correction phase, one needs to adjust the trading time frame and risk to suit the new reality.

In my style, I like putting all probabilities behind my trades. When you are in confirmed uptrend the individual market behaves differently. History repeats itself and if you look at historical precedents you will find when leading stocks, after a climax run reverse, it usually is a loud warning sign. When risk is very high, in my book it is prudent to wait out such periods. Individual investors have advantage of flexibility, where you can deploy your cash quickly and get fully invested. Mutual funds and other big investor have to be fully invested or have to move large size and cannot be so flexible. If the market turns in next week, it is not very difficult to get fully invested.

One of the problems with long running bull markets is it conditions people to trade in certain way. When the underlying dynamics change, people are slow to react and continue to trade same way. By the time they realize what is happening, in many cases the account suffers. Flexibility and adaptability is key when market character changes. Methods should adapt to market quickly.


F-Trader said...

The thing is, the dynamics of this market changed a while ago, like at the latest early November for sure.

I think you're right that longer-term investors might be better off waiting for a confirmed trend change, but I'm not so sure shorting at these levels for a long term investor is the best idea, maybe short-term traders.


Excellent article.

If possible is it possible to elaborate more using steps/flow like you used in IBD200. Might be difficult as this is more a subjective matter.