I start this post with two sayings from Ray Dalio, arguably the largest hedge fund manager in the world.
“The way to look at any market… is to look at the buyers and sellers and to understand who’s buying and who’s selling and what the motivations are behind that.”
“Too many investors are reactive decision makers… if something has gone up, they say ‘ah, that’s a good investment,’ they don’t say ‘that’s more expensive.’ It’s the most common mistake in investing. You have to look ahead and say what is the transaction? What will determine the buyer or seller?”
More about Ray Dalio here:
I was reading his comments yesterday and it struck a chord within me because I have been making the transition from a reactive investor to a proactive investor.
A proactive investor, regardless of the market he invests in, is one who has developed a way of anticipating what the smart money in that market is doing and how to piggyback their entries and exits.
He always seeks to answer four basic questions, using whatever approach (fundamental analysis, technical analysis or both).
1. Where is price going – uptrend, downtrend or ranging?
2. By what volume – by what minimum number of basis points in that direction?
3. How do I know when I am wrong?
4. What do I do if I am wrong?
Well, based on my quest to trade proactively and not in a reactive manner, I always seek to answer the above questions and I only take a trade when I am able to answer all four questions.
For example, based on my market timing tools, as shown below, I have maintained a buy bias for a particular stock Guaranty Trust Bank Plc since 11th March and I remember several investors/traders saying that the stock cannot go beyond N25, thereabout, but I disagreed because they all couldn’t give me a logical backing as to their bias.
Yesterday, as I had anticipated, price spiked up all the way to N27.5. As anticipated, I find it instructive that GTB opened up Q2 2013 with a spike upwards, thus confirming my bias.I now expect profit taking at N28, short to medium term and N38, in the much longer term.
Yesterday’s move left some of those investors/traders befuddled, but I was not surprised. Rather, I was surprised that they were surprised. But then again, I personally do not know many traders who use a systematic approach as the basis for their investments in the NSE. The average investor is at best discretionary and at worst, befuddled. I hope this post draws them out.
Am I always right? No.
But the trading edge is not in how often you are right or wrong. It is in how much you make when you are right and how much you lose when you are wrong. So seek to make more every time you are right than what you will lose every time you are wrong.
A systematic proactive approach to investment trading is the secret to every successful trader/investor.
For me, technical analysis of the Nigerian Stock Market is my proactive approach.
I watch order flows, observing the NSE All Share Index as well as market ebb on a rolling quarterly basis . Then I target technical momentum trades on fundamentally solid blue chip stocks.
So, I ask you, what is your proactive approach?
We learn everyday.
Olufukeji Adegbeye CWM.
DISCLAIMER: This article and all its recommendations are purely for educational purposes. Margin trading is highly risky and is not suitable for all kinds of investors. Kindly consult you financial advisors before making any decision based on the content of this post.