Contrarian Investing and Simple Guidelines to Improve your Trading Skills

By: Sol Palha | Mon, Feb 20, 2006
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"Money is like fire, an element as little troubled by moralizing as earth, air and water. Men can employ it as a tool or they can dance around it as if it were the incarnation of a god. Money votes socialist or monarchist, finds a profit in pornography or translations from the Bible, commissions Rembrandt and underwrites the technology of Auschwitz. It acquires its meaning from the uses to which it is put." - Lewis Lapham

Here are a couple of suggestions, we are in no way stating that these suggestions encompass everything one needs to know about trading but they can seriously help you on your way to becoming a better trader/investor.

1) All popular magazines, news articles and TV stations should be used only for getting information on what you should not do, in other words if they tell you its time to buy technology its time to get ready to sell. If they tell you the market looks like they are going to crash, we are probably close to a bottom etc

2) Spend time learning the basics of TA and the almighty time-tested principle of Trend analysis.

3) Have a plan. Don't be a fool and sit there wishing for that one huge win; those that do so, always catch a falling dagger.

4) The plan should include profit targets on each and every trade, plus and this very important, an exit plan, in case the trade does not work out.

5) Never ever, ever I will say it one more time, play Options only, it should be part of your investment plan but not your only plan. You are far better of playing futures if you are going to waste all your money on options only, futures are much cleaner, less slippage, less spread and you can get a feel for it because you can study the pattern of one market. I am not saying that everyone should get up and play futures, but if you are going to be a fool and play only options, then the wiser thing to do would be to learn futures and attempt to get in tune with one of the markets i.e. Dow futures. In addition remember the saying "A fool and his money are soon parted". Having said that options are absolutely fabulous instruments to lock in spectacular profits when used in moderation.

Let me talk about something I mentioned some time ago. I stated that with proper money management one could lose his entire options portfolio and still walk away with a profit.

We will use a 100K portfolio for this example

10% is 10K

Okay you lose the entire 10K by playing options idiotically.

Now you play nice and safely with the other 90K and you make 30% for the year. Don't say it's not possible; examine any of the best performing sectors and you will see that many stocks in them are up over several hundred percentage points. These top performing sectors were among the worst performing sectors at one time. The trick is to take a position in them at the right time and wait for the right time to sell. So you make 27K that brings the total to 117K but lets say you make only 20% that brings the total to 108K, you could even make 15% and still walk away with a profit.

The key here is that you live to fight again and then you can take some of these profits and play options once more

6) Learn to relax, if you don't relax its really hard to win.

7) Never act desperately because the little you have will be taken away from you to teach you the true meaning of the word desperate.

8) This last rule many of you might or might not agree with me, help one person in your lifetime and your rewards will be a 100 fold.

Additional footnotes on contrarian investing.

A true measure is that you buy because the price is at mouth-watering levels, it's in a strong sector, and you checked the charts. Your buy passes the basic technical analysis tests.

Most importantly, though, is that even though everything looks good, you are scared. You are thinking, "Hey, am I the only one buying. I don't want to go against the crowd. A true Contrarian always feels this fear and you have to fight it, and say, "Now is the time to buy."

When you are overly confident, it's time to flee. Never get a hot head and think you know it all. Even the best can be taken out. Keep your mental stops tight in this volatile market.

Contrarian investing is really about emotions. You are overcoming your emotions and playing on the emotions (fear or greed) of the crowd by taking an opposing position.

When you take a position and people look at you with disdain or shock, you know you are doing the right thing. When they pat you on the back it's time to flee for the exits. The buy low sell high principle in reality is total humbug because one can never predict the exact low or the precise top. What one can do is buy when a market is bottoming and with luck it might actually end up being the low and conversely start to sell when a market is topping and with luck you might actually sell at the high. Trying to predict the exact high or bottom is a stupid and futile endeavour.

"The only point in making money is, you can tell some big shot where to go." - Humphrey Bogart 1899-1957


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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