Thursday, November 11, 2010

Trading issues people have

My largest problem I had when I started to trade was dealing with the concept of Risk.  Now there is always risk in securities the valuation is never known and in my opinion along with there is never equilibrium in any market.  There is always a bias.  Another thought that I have grown to learn is that being that we are human and often shortsighted we are almost always wrong in our thought process.

So in dealing with markets, uncertainty, and risk how does one get comfortable?  Do you do your research and make conclusions?  I have found those conclusions are 3 months late to the party and those ideas were already thought about before they even happened.

If our assumption is that securities are never properly valued how does one know when to buy and when to sell?  This is and continues to be everyone's problem in capital markets.

How do you over come this?  I must say it is difficult and that is why most people don't have a relationship with markets. 

If you believe something is going up, all you have to do is buy a little.  If it then in fact goes up you then add more capital to your idea.  That way you know your thought process is correct because the market is telling you that you are.  If the market goes down, then you can scale back out of the stock with minimum losses (remember there is some risk to this).  But, remember if it went up when you initially purchased the security you are probably correct in your thought process.

This takes the uncertainty and uneasy feeling of how to time the market correctly which is very difficult in nature.  Why is it difficult, people are always wrong, your conclusions have already been thought about, you don't know who is actually in the market, and you have no idea how high or how low a market will go.

Recently my father told me he bought ESI:

I see a downward bias until it holds above the green line at the top (remember opening range of the month determines bias).  I also see resistance determined by the prior month's action.  He came to some fundamental analysis where the p/e ratio was far less than the growth rate.  This can go up or down, it is not something that I would put risk on but, if investing was as easy as doing some analysis on p/e vs. growth rates then every finance professor in America would of retired before they turned 35.  (please note his time frame is different than mine in that I trade more short term)

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