The Intermediate Term - Staying on the Right Side of the Trade

Another bit of commentary regarding some trading and our general philosophy.

Any time you invest in anything (or for that matter, opt not to invest), you're taking a risk.  Our goal in trading is to move in alignment with the fundamentals, accumulating assets that are gaining in value and only moving out of those assets when there's a solid reason to do so.  Let's contrast this viewpoint with a few other strategies, and in our opinion, the pros and cons thereof.

Short term traders range from day traders to swing traders and try to capitalize on very small moves in the market.  Short term traders attempt to make profits by price arbitrage in a short timeframe and with leverage.  In this manner, making $0.02 on a large number of shares purchased with borrowed money can be a profit making bonanza, but the risks are high.  Every time someone enters a trade, there's a risk that it's the wrong move.  Short term traders must make frequent trades, and given the high leverage involved, need a very strong money management strategy to protect themselves from the leverage going against them.  Very few are consistently successful.  As one's timeframe becomes shorter, the risks become greater and the market becomes more unpredictable.

In contrast, long term investors that buy and hold often have to endure vicious corrections to the downside and significant periods of loss.  Over a long enough period of time (the fundamental timeframe), most trends are predictable.

We tend to trade in the middle--in what we refer to as the intermediate timeframe, which occurs in the 6-12 month period.  Over this timeframe, we use short term technical analysis to build or reduce our positions, the long term trend to make sure we're in alignment with the fundamentals, and the intermediate term trend to avoid substantial losses and manage risk.  It is the intermediate term timeframe that is key in our analysis, which is primarily a combination of daily and weekly data.

With rare exception, knowing the intermediate term trend ensures you're in the right side of the trade.  What that means is that if the intermediate term  for an asset is positive and upward moving, we would not bet against that asset even if it is correcting.  Instead, we add to positions when the short term is weak and the intermediate term is positive.  If the intermediate term appears to be weakening, then during a short term correction, we reduce our exposure.  If the intermediate term turns negative, we exit the position and go short when the short term goes negative.

This has protected our positions since this cyclical bull market began in 2009.  Longer term, we still expect to see the markets turn over.  But as so many bears have come to realize, if you go short on a market that has an intermediate term bullish strength, you can be taken out quickly and painfully.  At some point, when the markets show that over the intermediate period they are vulnerable, then we will switch sides of the trade.  Until then, the trend is your friend.

If you want to know a bit more about how to determine when the intermediate trend is changing, send us an email.  We're actively working on building a mailing list for those interested in more detailed information than we tend to post on the blog.  We will not sell, distribute, or otherwise divulge any email addresses or other information sent to us.

Stay on the right side of the trade.