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Eight lesson for Perplexed Perma-Bulls
Posted By Barry Ritholtz On June 15, 2006 @ 12:20 pm In Apprenticed Investor,Investing,Markets,Psychology,Technical Analysis,Trading | Comments Disabled
I had a very interesting discussion with a usually bullish (but circumspect) friend who writes me:
“Man, you bears had an 11% Nasdaq move to the downside that you’d been calling for, yet you have been trying to play the upside most of the way down. You could have shorted it at any time and printed money.”
Unfortunately, it doesn’t work that way. Why not? Because:
1) The initial move down is usually a warning – we don’t just collapse from new highs.
2) There was no indication to GET SHORT NOW — not, at least, in a prudent risk/reward manner. Merely having a 2%, 4% or 6% drop ALONE isn’t enough to make me want to short.
3) You don’t get to top tick the move down, nor cover at the precise bottom.
4) The SPX was down 6% — again, that’s a warning shot across the market’s bow, not the 30% collapse I have been discussing.
5) Playing potential upside by putting on a 1% position on with very tight stops is not a reversal call – it’s merely a probe.
6) Tuesday was the first time I specifically wrote something up and said BUY EM — and that was emailed out to subscribers  and the media in real time. Thats a big differnce than simply putting as toe in the water;
8) Its important to grasp that different long/short entries present very different risk reward ratios – that’s why shorting in the 8th inning of a move down presents a huge difference in how much you risk versus potential rewards than buying what you believe could be a reversal point.
Ultimately, you have to put on trades that fit your parameters and present the best bang for your buck.
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