Stock market gambling... what I've learned

I just pulled out of the gold market for a breather with a 7.8% return for the year... rubbish if you compare what was available (more like 60%) ... but I've learned alot.




Stock prices show a random undulating pattern - tomorrows price is based upon todays price. Ideally we predict every trough and buy and every peak and sell. I buy into the wave analysis and fractal guys in that peaks and troughs occur at different scales. You can pitch your scrutiny of the graphs at whatever interval you like - weekly, monthly, yearly and follow the peaks and troughs at those scales.






I'm currently playing around with weekly and 3monthly to try and slow my trading down and make predictions on these scales. When I first started I paniced at every down turn thinking the price was going off a cliff and bought whenever the price looked to be going up. Such behaviour leads to being "out of sync" with the trend and buying at the peaks and selling at the troughs! If you make a loss just wait until the market recovers is a slow but sure way to get the value back. Continual shifting capital around looking for profit seems only for the real dedictaed and is highly risky plus expensive given about a 0.5% cost to buy and sell.






Key things to look out for are the patterns of peaks and troughs which tend to have multiple highs and lows - in particular the head&shoulders for a downturn and the cup& handle for an upturn. I am currently wondering what the handle&cup in the silver price means?

Another crutial understanding is the awareness of bubbles. They say a bubble has many stages the last of which is euphoria, "when even the shoeshine boy is giving stock tips" it's time to sell. I got hit by the gold bubble burst last time expecting the financial crisis to play out fast and logically - but it didn't and investors were remarkably slow to digesting information. What is unfolding now we knew about 18months ago yet it has only just hit the markets for real! The economy has a lot further to unravel and gold has a lot further to go, but the timescale is years not weeks!

Quickly ethics. I'm only trading in silver and gold because their prices don't really impact on peoples lives, they are not shares in anyone's labour, and they are a good alternative to fiat money while the banking industry messes up its own value system. However I am accutely aware that the markets don't create wealth at all because there is no labour. Any profit I make is at the cost of someones else - it is the old mercantile system in full display!



Finally a point of interest that no-one seems to ever discuss. The price is purely the result of investor behaviour. If confidence is high: the price is high and vice-versa. When reading any technical analysis then it is worth bearing this in mind. If people will be inspired toward a stock by news, trends or technical analysis even if there is no real underlying logic then the price will rise and vice-versa. It is good to be irrational in trading. Smart in predicting the wolf but then like a sheep in prediction how the market will behave.



Now for the really smart of course we are in game-theory territory here. The movement of stock trends is really just a vast game of various competing strategies. At some time in the past certain trends have been noticed and now people follow those indicators and trends which thus makes the market behave according to the indicators and trends. So while technical analysis works it is simply because people follow technical analysis that it works - a self fulfilling prophesy not a principal of the markets - something worth remembering. But of course what I say here if it affects market behaviour will simply feed back on itself untilw e have some kind of stable population of strategies out there... that is the real secret to understanding the market - the population of strategies amongst investors.



I look forward to seeing what happens here in the gold trend. A double top I believe may have been formed and this will be viewed by the technicians as the end of the 8 year run for gold. Given the amount of caution thus generated many people will be talking this market down now - as indeed I'm doing sort of. Of course all this plays out over the battle between fiat currency and gold currency and the results depend more on who wins that. While being very bullish for gold given awareness of the weaknesses of the capitalist system, for some reason I sense the end of this episode coming and the fiat system having survived... this time. Then of course there is the vast inflation comming when the banks start working again. So there's got to be plenty of upside for gold in the future.

That all said its like Heisenberg: you say something and you change the system. A writer when asked on his next book said ' you can either talk about something or you can do it, and I want to write about it'. Decisions for tomorrow's investments are only based on sentiments today, they are not dictated by today...

-- update : interesting post from a fractal analyst

http://www.kitco.com/ind/nichols/feb272009.html