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  • Writer's pictureT. Livingston

Trading Lessons From 2021

As the year comes to a close and we get ready to turn the calendar to 2022, it's wise to reflect on the lessons learned over the past 365 days. Here's what stood out to me in 2021.

Every Year Is Different

The market is a cunning and shrewd master. Just when it seems you've got the puzzle figured out, it flips the board on you. As Winston Churchill once stated, "Generals are always prepared to fight the last war." 2020 was such as fantastic year for traders that it could be easy to think that whatever worked last year would work again in 2021. However, after extremely strong years, the market often needs time to digest its' monster gains. I wrote a blog post last year around this time that while those who were out of the market throughout 2020 missed out, there will be periods of time in 2021 where being able to sit out would be the best decision to make. The market eventually returns to the mean. Periods of excess or extreme bullishness eventually get worked out through bear markets, corrections, or time. It could be easy to believe after 2020 that the best strategy was just to constantly trade growth stocks. However, with a new year comes a new market and what works one year often does not work the next.

It is also easy to get biased and start to believe we have the perfect strategy to produce profits from the market. However, the truth is every strategy has its' season where it outperforms. 2020 was a great year for growth traders who used a CANSLIM style of trading. 2021 favored those who chose to buy and hold the S&P 500. There will be years where value investing reins supreme or even times when cash is the place to be. The future will not always look like the past because every year is different. In fact, sometimes the strategy that worked the preceding year may underperform in the next. Take Cathie Wood as an example. She was a media darling last year because of her stellar returns, but her same approach has drastically underperformed in 2021.

This is not a personal knock on Cathie Wood or her strategy. I'm just merely pointing out that what is in favor one year, may not work the next. In fact, when something becomes obvious or is being highlighted as a paradigm, it is usually too late.

Be Careful After Periods of Massive Success

Paul Tudor Jones once warned, "Don't have an ego. Always question yourself and your ability. Don't ever feel that you are very good. The second you do, you are dead." There were a lot of Wall Street geniuses about this time last year, but that's actually the time to watch yourself. I've had far too many instances where I gave back large gains. What happened? Well, I lost my discipline and got sloppy. I began to think I knew it all. I'd abandon my risk management and my process. It happens to all of us. I actually now use myself as an indicator. Whenever I begin to feel like I've made a handsome amount of money and got the market figured out, I'm extra careful. The market may about to be turning. Remember, the majority is usually wrong at major turning points.

When You Are In A Hole, Stop Digging

We all want to succeed and produce large returns. After a series of loses, it's only normal to want to make the money back. However, trading more in a choppy or difficult market is likely to exasperate the problem. If you are in a period of difficult trading, take a reduced position size or trade less. It's even ok to stop trading. That's actually what I prefer to do. I always like to do less of what is not working and more of what is. Sometimes, more of what is working means sitting on my hands and not taking any trades. When I first started trading, I used to try to predict the stock market. My goal was to time each and every tick. Now, I use the market as feedback. What type of market is this? Is this a hot market or a cold market? What type of results have I been getting? Are the odds in my favor here? This type of mindset is flexible and allows me to bend with the market. Not only does it help my equity curve, it is actually much healthier since it takes the pressure of trying to outperform the market out of the equation.

After many years of studying the markets, I've come to the conclusion that the most seasoned veterans, those who've traded the longest, are usually inclined to trade less. They've learned the lesson that trading more does not equal more profits. In fact, overtrading was probably one of the pitfalls they had to overcome before they could gain massive profitability.

Remember, the market usually provides two or three strong uptrends in a year. Ask yourself if the current environment is one of those times. If it is not, the right decision is probably to drastically scale back your trading until conditions improve.

Index Action Can Hide Trouble Beneath The Surface

For the casual investor, the market is just the Dow Jones Index or the S&P 500. They will flip to CNBC and look at one of these two benchmarks to get a sense of what the market is doing. In reality, it takes more work and investigation to understand what's going on. In 2021, the S&P 500 was on a relentless uptrend, yet many individual stocks were actually having trouble staying above their 50-day and 200-day moving averages.

What's going on here? The truth is indexes don't really give you a good sense of what is happening because a few large companies can keep an index's price afloat while masking the problems of individual stocks. I wrote about this in late April describing the turbulence beneath the surface.

If you primarily trade growth stocks like I do, you probably had a rough time gaining traction over the past ten months or so. While it can be frustrating to compare yourself to the S&P 500 or the Dow, they are really not good proxies of what type of action this year was for traders. When looking at the Russell 2000, IBD 50 Index, and the Nasdaq's advance-decline line, it becomes much clearer why this year was so difficult: it was a choppy, range bound environment for growth traders.

Things Can Change Quickly and Flexibility is a Virtue

Things can change extremely quickly on Wall Street so it pays to be flexible. Don't get attached to a position or an opinion on the market. It's ok to change your mind if conditions change. Bend with the market. I was extremely bullish in the fall but moved to cash when I saw distribution hitting the market. Due to our modern technology, anyone can literally buy a stock in seconds so there's no need to worry. When conditions improve, it is very easy to increase exposure.

Crypto Cuts Both Ways

Everyone is drawn to the fantastic possibilities and spectacular returns of crypto, but it comes with a price. Think about if you could handle a 50% drawdown. If you can't, it's best to reduce your position size and to make a plan for how to manage your trades. Technical analysis can help you spot when a good buy point sets up like it did in January and when it's time to sell like it was in May. And later, when it's time to get back in like it was in the summer when Bitcoin and Ether bottomed.

Keep An Eye On New And Emerging Trends

I believe we are on the brink of a new and exciting time. Something big is occurring and the world is changing. I can remember the first time I went on the internet. I was about nine years old and my Dad brought home those old AOL floppy disks and plugged his computer into the phone line. After he logged in, we heard the iconic "You've got mail!" and my Dad navigated to a baseball website. "See," he showed me, "You can look up baseball stats here just like the newspaper." As a fourth grader, I had no clue of the potential that was opening up at that point, and frankly neither did my Dad or anyone else. Who could have predicted the dominance of, the rise of social media, and all the ways the internet would change our lives?

We are currently getting a glimpse of a new frontier. Crypto, the metaverse, alternative energy, electric vehicles- things are changing at a rapid pace. Keep an eye on these new industries as they are the ones to likely transform our lives just like AOL did in the early 1990s. Bitcoin, Ethereum, Mana (Decentraland), and Roblox are all worth watching in 2022 for potential uptrends..

Earnings Means Anything Can Happen

Like many other traders, I was very bullish on UPST prior to its' earnings announcement. I was extremely confident that it was about to gap up and double from its' current price. As it started to decline prior to its' earnings announcement, I was stopped out. I laughed as I was certain it was about to gap up 20% without me. To my surprise, it actually gapped down 18% overnight. No matter how bullish I am on a stock, I always use a stop loss to mitigate my risk.

Earnings are an extremely risky time. Be very careful holding onto a losing position into an earnings announcement. Remember, you can always buy it back and your number one priority as a trader is to manage risk, not to anticipate gap ups.

A Few Good Trades Can Make Your Year

If you struggled with your trading over the last few months, you are not alone. Since February, my winning percentage has been drastically lower than normal. However, I consistently cut my losses at around 5-7% knowing that a few good winners would pay for all the losers. Trading, like most professions, operates on the 80/20 Pareto Principle. Just as most business owners get 80% of their profits from 20% of their customers, the successful trader needs a few good trades to make his year. For me, I would have had a disastrous year if it wasn't for trades in TSLA, NVDA, MRNA, TLRY, Bitcoin, and Ethereum. It can be difficult to be stopped out on the majority of your trades, but if you continue to cut your losses, a few big winners can make a huge difference.

A Great Product With A Terrible Chart Is A Terrible Investment

While it can be beneficial to invest in a product you love and understand, price is the only thing that pays. A great product with a terrible chart is a terrible investment. You may consistently use PayPal, or love your Peloton bike, but if the stock is in a sharp downtrend, it's best to stay away.

Record Keeping Makes A Big Difference

You can't improve if you don't know where to start. I've been keeping a trade journal on my computer for over nine years now. As the years progress, so does my record keeping. I enjoy keeping statistics on my trading and on the general market as I believe it is the best way to spot trends in both the market and in myself. Click on this link to download a free spreadsheet to keep track of your trading and calculate your expectancy.

Get Your Mindset Right

I recently had a conversation with a friend who primarily trades stocks and crypto. I remarked how frustrating the last few months have been for me as a trader. His response made a real impression on me. "Well," he stated, "I guess that just means you need to focus more on projecting positive thoughts and energy." In other words, what my friend was saying was that when times get tough, that is the time to be even more present to your words and mindset. That's the time to speak of all the success you will have in the future and to remember your past victories. As sure as the sun rises and sets, there will be another period of strong uptrends in the market. That I can guarantee you. The key is to be prepared financially, emotionally, and mentally to take advantage of these inevitable opportunities. I'm confident that 2022 will be filled with both uptrends and downtrends, winning and losing trades, and most importantly, countless lessons to be learned.

Risk right. Sight tight.


Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained in this post constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned in this blog or the associated Twitter and Instagram feeds. The stock or stocks presented are not to be considered a recommendation to buy any stock or stocks. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.


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