Tuesday, November 20, 2007

A Note About Integrity

A good trader's loyalty is not to the bull side or to the bear side, but to the data. Conducting analyses with an open mind and faithfully following one's independent judgment is a form of integrity--one demanded by shifting markets.

In practice this means that I must remain true to the market data that I track each day, whether I like what the data are saying or not.

Right now, at the moment I'm writing this, the data are not supporting the bull case. We're seeing an expansion in the number of stocks making new lows, not a contraction. We're seeing weak sectors get weaker, not attracting longer-term value-oriented buyers. Advance-decline lines are making new lows, not sustaining divergences.

Tomorrow AM, I will summarize some of the data and some of these concerns. There's an old saying about the importance of knowing when to be concerned about the return on your capital and when to be concerned with the return *of* your capital. When weak markets don't attract sustained buying--and continue to weaken--my foremost concern is capital preservation.

Above all else, do no harm. It's an oath that works for physicians and traders alike.

4 comments:

heywally said...

Brett - When this weakness started, I had a heavy cash position and wanted to create some longer term holdings, which I've done by slowly scaling in to weakness; I now have about 1/3 of my planned total position and of course, I'm underwater on it now.

Without asking for too much detail, I'm curious it you do any longer term holding or do you do strictly short term trading (which might imply 100% cash right now)? TY.

Brett Steenbarger, Ph.D. said...

Hi HeyWally,

My long-term holding is in my investment account, which is completely separate from my trading account. I am looking for an opportunity to enter long equity positions in the investment account, but right now am 100% invested in high quality, short term fixed rate instruments purchased when rates seemed to be peaking.

Brett

heywally said...

TY Brett - it seems that you are in the correct position right now in your investment account. I've missed my chance over the last few years to establish longer term holdings during the various pullbacks but have decided to finally 'take a stand' by inching in as the market has come down (am underwater on it right now). At least I can feel pretty good about only having 1/3 of my max position in place. Since I'm doing this 'for a living', I'm still day trading but with very small long-only positions during really extreme points of the selling.

Philip Litrel said...

I enjoted reading your comments and Heywally fyi I have a very similar situation and am "underwater" with axp and fxi due to put and call selling and asssignments. I try not to own ANY stocks at all just what I have to. I have enough $ to day trade but I recently purchased fxp to stop the bleeding in fxi. Good luck!
Phil