If you can embrace this metaphor, consistent profits are achievable. Think of the stock market as a mythical beast that feeds on truths but its behavior is driven by rumors and beliefs. To tame this creature, your suit of armor must be woven with the finest cloth of emotional control.
Let's first address the foundation of any successful stock's long term price appreciation. Yes, it's often a long and winding road, but eventually the factuality of steady sales increases and the authenticity of earnings growth will win the battle. This is the playground of the pure fundamentalists who say "just show me the facts."
If only actuality were that straightforward. Corporations have been known to fabricate sales (think about a certain Chinese coffee chain) and earnings do get restated. So, despite being an energetic seeker of the unvarnished truth about an equity, the veracity of your information must always be viewed with some degree of healthy skepticism.
The second leg of the essential trinity is news. In a perfect world, the journalist is your friend — and like you — aspires to present the unvarnished reality. Unfortunately, if you believe that and act upon it, you'll discover you are often led astray. My own take on journalists and newspersons today is that they've become newsmakers. It's all about ratings! They literally create news that's skewed through their own lenses of opinions and then present their perspectives in the hopes you'll embrace it all as gospel fact. Each newsmaker does it differently.
Couple this with today's new instant data flows and social media's ability to spread contagion, and it's easy to understand why irrationality thrives, why the markets swing between wide extremes, and why information accuracy is difficult to ascertain.
Similarly, stock analysts are only human and are also guilty of expressing over reactions — be it exuberance or negativism about a stock. Your objective as an investor is to vanquish these distortions by deploying your own lens of actuality.
I wish I could sell you a set of glasses to wear by which you could magically see only truths and facts. But sadly, you are stuck with the lenses you have. That's okay. You just have to polish those lenses carefully.
The challenge you face as an investor is that you must learn to identify your own false beliefs and expectations to let go of your other potentially harmful notions and perspectives. In my own situation, I feel that I've achieved this by anchoring myself to my charts, not exclusively but first and foremost. There will always be both uncomfortable truths and comfortable truths. Can't change that, and the charts will reflect both of these realities.
But unlike with much of the media where I feel I'm looking at a house of mirrors with limited access to truth, my charts are a clear window through which I can see the resulting actuality of the auctions between buyers and sellers which make up our stock market. I've found that when I truly align my unfiltered perception of reality to the market's reality, I become a consistent money-making machine.
The third leg of the trinity is controlling your emotions as an investor. In Stage 3 of our book, "Tensile Trading: The 10 Essential Stages of Stock Market Mastery", we illustrate how the Investor Self's own behavioral inconsistencies must be first understood and then reigned in. Much like our dealings with family and all the personal issues we bring to that arena, investors must acknowledge that their desires, passions and feelings about money and investments is baggage they also bring to the stock market table. Powerful sentiments, if not fully appreciated.
I once had an exceptional Wizard investor tell me that the best traders don't just accept their mistakes, they delight in their ability to react quickly and change course. I also take this to mean they do so with respect to their own behavioral issues, not just with respect to a particular stock position.
I believe the rules can be summarized as these:
- Aspire to be truthful in your perspective
- Be humble in your convictions.
- Be flexible on your positions.
Let's label it "confident humility." So, there it is. Make money by respecting the sacred trinity of Truths, Beliefs and Behaviors. To paraphrase for my fellow technicians:
• See the Chart
• Believe the Chart
• Act upon the Chart
Trade well; trade with discipline!
- Gatis Roze, MBA, CMT
- Author, "Tensile Trading: The 10 Essential Stages of Stock Market Mastery" (Wiley, 2016)
- Presenter of the best-selling "Tensile Trading" DVD seminar
- Presenter of the "How to Master Your Asset Allocation Profile DVD" seminar
- Developer of the Tensile Trading ChartPack for StockCharts members