My last writing (http://web.wenxuecity.com/BBSView.php?SubID=tzlc&MsgID=75465) mentions we can only make money in our life (stock market as well) on the things we understand, or understand better, so we don't act like a gambler. Here I will talk about how we know we understand (better) on certain things in stock market.
First of all, we need to know our strength and ability in the stock market. If people are asked to lift a 500-pound stone only by their physical strength without using any tools or machines to help them even with a $1,000,000 reward, some people will not even try.( Only certain genius weight-lift sportsman can do such jobs.) Some might try but most likely will give up after maybe maximal of 2 or 3 times of failures. But in stock market, common investors are trying such practice everyday.
Everyday in stock market someone is trying to figure out whether we are at the market top or bottom; someone is trying to figure out whether the US dollar will bounce or continue to slide; someone is trying to figure out whether Chinese market is a bubble which is going to blown out after summer Olympic Games; or maybe someone is trying to figure out whether oil is going to be $50/barrel or $100/barrel. My opinion is that if you try to figure out the answer of any of above questions, you are trying to lift a 500-pound stone because if you think those questions themselves calmly, you will realize that those questions are too big for us to answer. And worse than trying to lift 500-pound stone is that, if your investment plan is based on your answer on those questions, you are blindly gambling in the stock market. You might win and you might loss. That is only maximal of 50% percent of chance for you being right here. Even if you “guess” (or you think you get) the right answer, since you don’t believe you can get that answer yourself from the bottom of your heart, any market movement against your answer will shake you and make you “fear” (remember “fear” is regarded as one of the two biggest mistakes in most people’s mind?) and wonder whether your answer is correct, and then you start to make the mistakes. So your chance of winning is small. Again, for any of the above questions, no one knows those answers for sure, so we as regular investors will not know those answers.
Some other people love technical trading. They read books, attend classes and study the stock charts. They start to trade based on those theories. I don’t do technical trading myself, so I cannot give many comments here. But my personal experience is that years ago, I bought a Trading service which trades DIA using certain technical indicators. (I also think if I cannot do certain things, I will ask professionals who can do the work well.) The guy who “invents” the system is supposed to be pretty good for I followed him quite a while before I purchased his service. His system also has terrific backtrack performance. But the result is I lost lots of money (not just the big subscription fee). The main problem is that such system might work in long run, but again any market movement against the system will make you shake or fear because you know there are no solid reasons for such system to work. In math pattern we know the number after 1, 2, and 3 is 4, but in stock market it could be 100, -100 or any. Trying to find a pattern purely based on stock price movement is extremely hard if not impossible in my opinion. So when you try to understand such things and you think you can get it done in your trading, you are trying to life a 500-pound stone. If you don't believe you are weight-lifting genius, don't try that.
In my next writing, I will discuss something that we have better chance to understand or even understand better.
