“I wish I had the nuance…I absolutely don’t have it yet…but hoping that by following you and others that one day I do get there, the sooner the better…”
Yeah, whether it’s fishing, or investing, or anything else where outcomes are uncertain, experience matters, because no set of rules will ever cover every possible situation. That’s why AI is overhyped nonsense. For sure, when the outcomes are finite and path dependent, a computer program will come to the “correct” answer faster than a human, and it will do so every time without fail.
Markets aren’t equilibrium systems in which each action has a predictable reaction. But that’s the way one should bet. Over-sold//over-bought is likely to correct back to the mean. It doesn’t have to, nor does it have to do so quickly or in progressive steps. But that’s the smart way to bet. But the bet can’t be so big that, if it fails, you get thrown out of the game.
Here’s an example I’ve used before. If I have $10 bucks and you have $1 one dollar, we can flip for pennies all day long, and neither of us will walk away a significant winner. We might be up or down a few cents. But another round of play is as likely as not to correct that imbalance. However, if I switch the bet size to two bits, I could break you in as few a four flips. In fact, there’s a 6.25% likelihood of that event. That might seem like small odds. But the odds of me calling heads and being right three times out of four is 25%, which begins to get significant. More importantly, it ought to undermine your confidence that you could survive playing the game another round. Traders have a term for this situation. It’s called “trading with scared money”, and it’s a sure path to ruin.
So, what to do? Always assume that the opposite side of your trade is smarter, faster, and better capitalized. So, don’t trade against him. Trade with with him. Wait until he makes his move, and then shadow him. How do you know when he’s making his move? ‘Volume’ is one cue. Are prices rising/falling on increasing volume? How’s the tape in printing? Are the trends self-evident, or are they choppy? What’s market breadth like? Are lots of sectors moving up or down togther? Also, avoid trying to trade setups that aren’t drop-dead obvious or are likley to overwhelmed by exogenous factors, the chief of which is earnings announcements, economic reports, and Fed meetings. If the market is expecting big news --good or bad-- go to the sidelines and let the traders over-react as they always do. When the dust has settled, which might take as little as 90 seconds or it might take a day or two, then get back in the game.
Suggestion: If you want to develop “a feel”, then you’ve got a couple of choices. #1, Do lots and lots of small trades and score them, not by the money lost, but by the experience gained. That means keeping a trading journal and doing post mortems on every trade, trying to answer these three questions. “Did I follow my rules?” “Did I see in the chart or the financial statements everything that could have been known?” Lastly, “Why did the trade actually work (or fail)?” Lots of times, there will be no easy or obvious answer. If money was made, light a candle and thank the market goddess. If money was lost, decrease your bet size, but don’t walk away from the trade. Sometimes, it takes a several tries to get it right.
#2. Another way to develop “feel” is to narrow your investing universe to a limited number of contracts whose wiggles and waggles, ups and downs, you come to know as well as you know how a friend would react when he/he stubs a toe.