Hindsight is a wonderful thing

Monday, 5th October 2009 22:16 - by Riddler

Welcome back to reality fellow traders. The FTSE has dipped beneath the psychologically important 5000 mark, unemployment is the U.S. was higher than estimated and the euphoria of the summer has dissipated. People are questioning the rationale behind the huge gains witnessed in world markets since March 2009 and now people are arguing that the FTSE, DOW, NIKKEI, etc. are factoring in a recovery that isn’t reflective of the ‘real’ economy. People are now asking themselves tough questions such as “Why did I buy stock x or y at the peak of the recent cycle” and asking themselves “Is this just a temporary blip?” Other traders offer little solace by saying “It was obvious that there had to be a re-trace” whilst smugly reading the latest analyst comments, which have now become somewhat more bearish, or realistic. We can equip ourselves with foresight which can help furnish us with data which prevents us from relying on the less useful tool we call hindsight. Those who follow my technical ramblings, or tea-leaves gazing - as the cynics point out, will know that I favour technical analysis for aiding entry and exit points, which can help us make better decisions more often. I offered some thoughts on the 19th September, on page 60 and 61 of 'Riddler’s Technical’s', of where the FTSE may be heading, which therefore may act as a guide as to where the ‘general’ market may be heading. This was a good week before the market really started to show reversal signs. If we know that the market is reversing, we can put into action some preventative measures such as top-slicing profits to keep a cash reserve which can protect us from market falls, and enable us to buy in at a lower level for stocks we are keen on. Some traders will have set up index trackers where they will ‘go short’ on the market to act as a counter-balance to ‘long’ positions. Traders might also decide to be passive or not trade until the market correction has ended. Technical analysis of freely available data can give us a head start, and allow us to plan for changes in market direction BEFORE they have happened - as opposed to reacting to the market. This foresight doesn’t mean that we haven’t got freewill, far from it. We can decide whether to ignore the data or to use it as a benchmark for our decisions. I have locked in profits on some stocks, but also bought stocks this past two weeks. In the case of one stock, I completely ignored my own ramblings and committed the sin of becoming too partial to a stock, resulting in some minor losses. The moral of the story is that even with the advantage of foresight we make human errors, based on the human emotions of greed and hubris. In hindsight, I should have listened to myself!