I sent an email to a few of you late last night after seeing the futures fall over 2% in the first few minutes of after-hours trading. I am quoting the email here …
==begin quoted email
Futures are down almost 2%. With that said, I'll be watching the morning very closely as it wouldn't surprise me if we have an awful opening and then the rest of the day rising. In other words, there is a chance that we are near a short term bottom. Buuuutttt, it also wouldn't surprise me if we tank hard ... Don't really know how the market will react to the sp downgrade.
In some ways, I think Thursday's 5% decline was this news ... That it was leaked ahead of time and that sell off was a result. If that was the case, then hopefully we only have up from here.
Time will tell. I'm still sitting on a sidelines at the point, not shorting or going long.
==end quoted email
Well hindsight is obviously 20/20, but I wanted to use this as an important example … which is to point out the difference between gut instinct and real facts. My gut told me that we were at a bottom and that it was a good buying opportunity, but my analysis was showing something very different. Going with your gut in the real world is something that I feel offers an incredible strength, but going with your gut in the trading world is something that will make you broke quickly. There have been many studies on why this is which I won’t bore you on today, but it is an important hurdle to understand and accept when trading in the market. As I mentioned above in the email I sent out … my gut was telling me one thing, but I was going to wait for confirmation before acting on my gut. Obviously, this saved me a pricey loss today. FYI, I’m still sitting on the side lines waiting for a clear signal to act upon.
I have found over the years, capital appreciation (making money) is obviously imperative in the trading world, but capital preservation (not losing money) is much more important. I am grossly generalizing here, but what’s the difference between making 10%, or sitting out of the market while it loses 10%? I would much rather sit on the side lines and miss out on an potential opportunity, then go for a possible buy and lose … and today is a perfect example of that.
Trading in the stock market is all about probabilities. Some days you have a greater probabilty to win than others, and using those probabilities to time your purchases keeps you on the right side of the market at all times. This is probably my most important step in my daily trading repertoire … it is not what to buy, but when. It really doesn’t matter whether one company is priced at a better value than another if the entire market is tanking like it did today.
Trading rule #1 – always preserve your capital so you have it to be able to fight another day