Every General Fights The Last War
Any World War II historian knows the story of the Maginot Line. Built in the 1930s to deter a German attack, the series of fortresses was deemed impervious. However, what the French did not realize is they were planning on fighting their last war, World War I. They did not anticipate the rapid bombardment they would encounter under Nazi blitzkrieg nor the ability of the Germans to advance through Belgium, the Netherlands, and the Ardennes Forest.
Traders often make the say mistake. They study their last trade or a previous market cycle and design a system around that particular period of time. However, the market, like war, is constantly evolving. There will be years like 1999 and 2020 when stocks go on insane runs, and it looks like the bull market will continue to run forever. There will also be years like 2008 where it looks like the world itself is about to end.
The market is always evolving and changing. There will be times when trading growth stocks is in fashion and times when value investing outperforms. And they're will even be times when cash is the wisest position. What's ironic is that when a particular strategy finally gets recognized for its' success, it is usually too late. That's actually probably the time when that strategy will soon be out of season and need a period of rest. For example, there will be times when trading breakouts on growth stocks yields fantastic results. This is usually around the first few months of a new bull market, right after a bear market has ended. However, as the months go by and the market gets extended, the odds of this strategy working decline. This makes sense as the market, like everything else, has its' ebbs and flows.
The key is you have to have the ability to adapt to the market. Just as the sailor cannot adjust the wind but can adjust his sails, you must look at the underlying conditions set before you. Ask yourself what type of market we are in and plan for that trade, not last year's market.
Stuck in a choppy market? Plan to take profits sooner, cut losses even quicker, or just sit out until a trend develops. What about if the market is in a deep correction or bear market? Here, it's best to monitor the market closely while in cash. Be on the look out for stocks holding up well and approaching their old highs. These may become the new leaders if the market begins an uptrend. And when you do get that market bottom and the new bull market you've been waiting for, that is the time to hold your winners a little long and play for some larger gains.
Paul Tudor Jones once wrote, "There are times when every market has a story to tell. And you have to train yourself to be both a great observer and listener, or you will be too late to enjoy the full story that will be told." That's really what it is all about. Rather than telling the market what you want or how much you plan to make, listen to what the market is telling you. Think about what type of environment you are trading in and if it is even wise to be trading at all. The market is a war and those who are not prepared get destroyed. Make sure you are ready to trade the current market and are not fighting "last year's war."
Risk right. Sit tight.
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