A Summary List of My Market Insights

If you are new to trading and investing, market prices may seem to randomly trade up and down without rhyme or reason, and when we take a position in the market the value of that position goes up and down too, tracking market prices; and therein lies the blessing and the curse. When we buy into the market (take a position) to earn a highly possible and attractive Market Rate of Return, we face the real risk of a periodic reductions in value along the way. The Market Rate of Return is on average about 5% for an all bonds index and about 10% for an all stocks index over longer timeframes, compared to much lower rates from traditional bank savings accounts and CDs. The rate of return on specific individual investments will vary and will depend on its growth characteristics, longevity, and the timing of the buy and sell operations. That risk, just like the reward, can be either temporary or permanent, and much of that will depend on us. It is very important that we develop the ability to be okay with normal market volatility, learn to see it as a blessing as we develop the ability to harvest and re-invest one profit after another. That will generally take time, money, effort, and lots of exposure to that volatility. It also helps to have a general understanding of what the markets are all about and to develop an understanding of what works for you on Wall Street (probably something like in the book by that name). In the balance of this document, I provide a summary list of market insights that were developed over the years while setting up and operating my market-based retirement business. It is how I work to minimize the risks of a permanent loss of our working capital (our retirement savings) and to improve the odds of realizing a long string of permanent rewards that we can live on or re-invest for later consumption. This is what works for me, a summary list that comes from My Trading Insights and Approach, which is a bigger summary of my main web document The Economy, Markets, and Profitable Insights.

  1. There are basically two ways for the average investor (saver) to make money on Wall Street (the markets for tradable securities): The sum of these two (capital gain + income) is called Total Return; and that should be our principal motivation to accept volatile Market Risk on Wall Street. We want to earn the Market Rate of Return. And once we have met or beat that objective, we simply must take some or all of that profit off the table. We need to book it (lock-in) that rate of return, and then re-invest the proceeds to earn a compound rate of return, which is the real key to wealth creation in the markets. Note, What the market giveth, it can just as easily taketh away. Also note that economic growth and stock buybacks tends to cause price appreciation for stocks over time, and that is another example of being paid to hold an equity investment that may not pay a dividend, which can be very tax-efficient.

  2. Market prices (trades) for securities naturally, and to some degree randomly over quicker timeframes, trade (trend) up and down based on a supply and demand imbalance for that investment (i.e., the current popularity of that security). Buyers (the Bulls) create demand and sellers (the Bears) create supply. When demand is strong, buyers are more aggressive, prices rally (trend upward); and when supply is abundant, prices decline (trend downward). Once a trend begins, that trend is likely to continue until it has gone too far, and then the trend reverses. All individual securities and group of related securities naturally go in and out of favor (trend up and down). When the momentary majority of the market participants want to buy, demand increases, money flows in and the price for that investment will go up until that demand is fulfilled, buying power is satiated as prices approach bigger and bigger premiums, which attracts sellers and thus supply becomes the dominant force as the uptrend reverses, creating a near-term top in prices. I cannot always tell which ticker symbol (security) or group of tickers will go in or out of favor next. But if that investment can survive, I can tell you for sure that it will go in and out of favor (cycle up and down) over-and-over again. Thus, giving all of us an opportunity to earn a capital gain over and over again, if we are paying attention to current market prices and we can develop the ability to buy when the prior excess supply gets overpowered by a new excess demand (close to a near-term low in market prices) and sell when the prior excess demand becomes overpowered by a new overpowering supply (close to a near-term high).

  3. Market prices contain information about implied future value. This information is called The Message of the Markets. Market prices are ultimately based on fundamental and technical analysis of all available information and the market's expectation of likely future outcomes. Fundamental analysis focuses on the underlying economic realities of the businesses and governmental entities that can issue stocks, bonds and other financial securities that we can buy, sell and hold. Technical analysis is a visual and statistical focuses on current and prior data, like market prices, to derive a quantitative (objective) insight about likely future prices of alternative possible outcomes. It is a real competitive advantage to be able to see this analysis, and it is an even bigger advantage to be able to do this for yourself.

  4. Market prices are both forward and backward looking. Market participants attempt to anticipate news about backward looking fundamental information and the market's reaction to the news, which can come at regularly scheduled intervals or out of blue. When forward looking (anticipatory) mistakes are made, prices quickly correct, factoring in surprising news. Learning to profitably trade these surprises is hard (i.e., to quickly enter a position and then exit with a profit). But it is not that hard to learn how to profitably trade the normal over reaction to these surprises (a longer-term swing trade). Plus, it is easy to take advantage of favorable surprises when they happen to your longer-term investments, but you must see them and be ready to capitalize on them before the opportunity fades away.

  5. Because market prices are forward looking, they naturally trade in an uncertain (dynamic) trading range. When prices get too high, become too expensive (relative to likely fundamentals in bigger timeframes and/or technicals in all timeframes), well-informed market participants step in and sell at premium prices, thus creating Resistance to higher prices and defining the top of that trading range. When prices get too low, savvy traders and investors step in and buy at discount prices, thus creating Support for higher prices and defining the current bottom. Savvy market participants work to capture cyclical price swings within these dynamic trading ranges as they develop along the broader market trend. Note that over the biggest trading ranges, for most individual securities that have a decade or more of trading history, the majority of all future trades are very likely to remain within 1 to 2 Standard Deviations (SD) (about 68 to 95%) of the trading range seen on most weekly and some daily charts; and the longer the timeframe (e.g., on most monthly charts) for any group of related securities, the closer to 2 or 3 SDs we get. This is just a historical fact that is very likely to be true in future too thanks to mean reversion of data with a mostly normal distribution. That is, there is money to be made in survivable investments that naturally cycle around a longer-term average, but this requires money, time, and a methodical ability to work this cyclical behavior. Note that if your security cannot fill a monthly chart, then it may not be a survivable investment and this insight may not apply. I have found that prices of large, mature Blue-Chips and Major Market Indices are (survivable) investments tend to have a mostly normal distribution with some occasional fat tails (i.e., there will be some extreme events, but the majority of the data will always cluster around the mean). Historical odds favor investments (trades) that rely on prices mostly staying within their broader trading range, and greatly favor trades that rely on prices cycling around, trading near a Moving Average (MA), often a little above an MA in bull markets or below in bear markets. However, over shorter (quicker) timeframes, trading ranges are more likely to surprisingly shift up or down as prices trend up or down in the larger timeframe. The odds favor strategies that accommodate this behavior, like Dollar-Cost Averaging and Value-Averaging. I introduce an averaging strategy below that uses the best features of these two tried-and-true strategies.

  6. Trading range exist in multiple timeframes. Trading ranges have a noisy, erratic, quasi-fractal (self-similar) relationship with smaller (quicker) trading ranges within larger (semi-cyclical) trading ranges. That is, quicker (smaller from top to bottom) trading ranges within slower (bigger) trading ranges. Bigger trading range existing in bigger timeframes that require more time to complete a cycle between support and resistance. An economic boom-bust cycle, a year, quarter, a month, a week, and a day are all examples of a timeframe. There are even quicker (intraday) timeframes, and some professionals have master these, but most have not. This quasi-fractal relationship exists because the professionals operating in each timeframe are all playing their version of the same profitable game (i.e., buy low, at likely near-term discount prices, and sell high, at likely near-term premium prices) all based on their superior ability to see and harvest profitable swings in their trading range. The quicker the timeframe, the harder it is to earn consistent profits. Bigger timeframes are easier to profitably work, but they require a greater degree of patience. Beginners should always work to master longer (easier) timeframes; and once successful, work to master a slightly quicker timeframe.

  7. We can use Charts to study the Wisdom of Crowds and to understand the Message of the Markets. Note that on any average day, 70 to 80% of all trading volume is driven by well trained and equipped professionals with a clear track record of success. These pros have access to the best fundamental and technical analysis. They know how to Win this Loser's Game. Charts show us what the pros are doing. They show what is happening now, what is historically possible, and can also give you a feel for the historic odds for the various patterns seen on charts. They show the market trend (momentum), the health of that trend, and the current Trading Range (TR). Like the pros, your charts should show volume, RSI and the standard 20-, 50-, 100- & 200-period simple Moving Averages (MAs). These MAs act like automatic trend lines. Prices bouncing off an MA and prior pivots (trend reversals) indicate Support and Resistance (S/R) levels. Minor S/R price levels are where the primary trend stalls or retraces, as the pros take profits, before resuming the primary trend. Major S/R levels are areas near the top and bottom of a Trading Range, where the primary (broader market) trend reverses; and thus, indicate the size of the current Trading Range, which can expand and contract and can also shift up and down (shifts are more likely in quicker timeframes) as surprising news hits the Market.

  8. Future price patterns tends to look a lot like the past, rarely the same, but often similar enough to favor those who study investing, business, and economics, and a few specific and appropriate investments (tradable securities), and that can also project and manage an investment (trading) plan for each into the future.

  9. The pros specialize and you should too. They became a professional by mastering some specific profitable activity. You can develop a profitable ability too. Wall Street and their supporting media are very good at generating distractions, lots of bright and shiny objects that are designed to enable Wall Street to feed off your savings. Learn how to ignore this noise. Focus on seeing and taking profitable bits out of repeating price swings in a broader trading range, like most professional portfolio managers. It is unlikely that you'll become a true Wall Street professional trader. But you don't have to do that to grow your savings for retirement. Become your own version of a professional investor. Focus on a few dissimilar investments that are very likely to survive, that will pay you to wait for better (higher or lower) prices, and that are very likely to see better prices sooner or later thanks normal price swings in broader trading ranges and real economic growth. Learn how to earn a consistent (and hopefully, above average) total return in investments that you truly understand. You can become your own investment professional, someone that can make a living in the markets. You can earn and pocket the percentage others pay a professional fund company to manage their investments by doing some variation on this approach. An extra percentage point or two a year adds up to be a lot of extra money over the long run.

  10. Like the pros, use a Multi-Screen Chart view into a Market to truly see an objective Big Picture. Focus on recurring price patterns relative to news, the standard MAs, RSI, volume, and prior pivots (S/R trend reversals) in three or more chart timeframes. Use a monthly (or weekly) chart to see the longer-term (big) picture and broader trading range, the weekly (or daily) for the intermediate-term, and the daily (or hourly) chart to see the shorter-term action. Professional Day-Traders have mastered quicker timeframes. If is unlikely that you'll be able to profitably compete with them. So, don't pay the price to learn that lesson. Focus on longer timeframes that are easier to profitably master. Wait for a favorable setup, like when the longer-term chart has a healthy trend, the intermediate-term chart is counter trending and is ready to bounce off a standard MA and/or a prior pivot, and the shorter-term trend is moving with the longer-term trend. This is a tried-and-true profitable trading approach that anyone can master if they can commit to it.

  11. Always trade with the dominate group (the Bulls or Bears) in the direction of the primary trend and within your ability to consistently take profitable chucks out of cyclical swings within the current intermediate trading range. If prices are above the 20 MA (the shorter-term trend), the 50 MA (the intermediate-term trend) or the 100 or 200 MA (the two longer-term trends), the Bulls are likely the dominate group and the odds are likely to favor Bullish (Long) Positions. When prices get too far above the 20 or when RSI is above 70%, beware of (look for) a bearish trend reversal. This is a good time to close profitable longs. For example: Prices are near the 20 or 50 and uptrending, enter or add to a long position. Take profits when prices move too far away from the entry MA and approach an S/R level. If prices are below the 20 MA (and preferably below a longer-term MA too), the Bears are the likely dominate power. Look for favorable Shorts (or just go to cash or very short-term funds and wait for price to stop going down on new bad news near the bottom of the broadest trading range). Avoid new shorts when prices get too far below the 20 or when RSI is below 30%.

  12. Keep your operations in-synch with the health of the broader market (primary) trend. A healthy trend is likely to continue. An unhealthy trend is likely to reverse. A healthy trend has prices bouncing off the standard MAs in the direction of the primary trend. But, sooner or later, the trend will go too far, becoming exhausted as prices reach an edge of the current Trading Range, signaling too much of a premium. The odds favor trading with a healthy broader market trend as seen on longer-term charts. However, all longer-term trend reversals begin in strong shorter-term charts when the longer-term trend has become unhealthy or when momentum has become exhausted as prices approach a Major S/R level (e.g., 52-week highs or lows). Whenever prices get too far away from the 20 MA or when prices and the MAs get spread out vertically, momentum will lose steam. As prices approach a likely Major S/R level, the odds and the trend are likely to reverse and retrace to an MA, a prior pivot, or the Trading Range mean, and may even swing further to the other end of the trading range. Professional traders employ a stop-loss exit when the trend turns or is likely to turn against them. You can also learn how to employ an appropriate stop, like avoiding trades that require taking a stop-loss, which actually locks in a loss in hopes of avoid a bigger loss. If your investment can survive, will pay you to hold, and is very likely to see better prices sooner or later, than taking a stop-loss trace is avoidable. It also helps to be mindful of the health of the primary trend and where prices are relative to the broader trading range when entering or adding to an investment, another investment stop-loss technique.

  13. Like the pros, Scale In and Out, thus converting the single Buy Low and Sell High prices into Two Averages that can be Managed and Optimized when you track your P&L details and plan out the alternative possibilities based on an analysis of the available data. This will require work and a healthy cash reserve. You don't have to be all-in all the time. This technique allows you to Buy Support, Sell Resistance, and Take Acceptable Profits in quicker timeframes (i.e., take advantage of shorter-term market opportunities when Mr. Market shows them to you). It also allows you to take advantage of longer-term Market Volatility and Price Improvement as Trends and Trading Ranges evolve over longer timeframes (i.e., as quicker, smaller trading ranges shift up and down with trends operating in bigger timeframes). Work to take profitable chucks out of the quicker trading ranges, when possible, and the next longer (larger) trading range when Mr. Market surprises you and turns your shorter-term swing trades into a longer-term investment that depends on normal broader market cycles and normal economic growth. If your security can survive volatile markets, will pay you to hold, and your trades are in-synch with a healthy broader market (economic) trend, than this approach allows you to avoid most shorter-term stop-loss trades. Just shift some or all of the position's open trades from a quicker trading range to the next larger trading range and work to earn acceptable profits in the security that you specialize in based on your analysis and planning. This may require a lot of patience and persistence, but these are profitable skills that any investor can bring to the effort of saving for retirement. Big professional portfolio managers scale in and out all the time, and you can do it too. If you track your trading details, use multi-screen charts to see broader market trends, likely S/R levels, and plan out (what-if) the alternatives, you can book some quicker profits when price swings go as expected, and you can also convert small timing mistakes into an acceptable profit sooner or later. Most professionals have (computer) systems that help with these details, analysis, and planning; and that clearly gives them a real-time competitive advantage. However, I know for a fact that this can be successfully done manually over longer timeframes using a spreadsheet; and in time, you may develop your own system that allows you to be successful in quicker timeframes.

  14. Compounding will naturally occur and will magnify your trading results. Positive compounding is the key to real wealth creation in the markets. Being a Consistently Profitable Investor/Trader (CPT) yields positive compound growth. Work to maintain CPT status, which is easier to earn in longer timeframes with smaller at-risk trade sizes. It is important to understand that you don't have to be fully invested all the time. In fact, having a healthy cash account allows you to take advantage of new high-yielding opportunities that will come over and over again and to work your way out of an equity drawdown that will happen, a lot; but that (a short-term paper loss) does not have to be turned into a permanent loss of capital. Save your stop-loss trades for when the broadest market trend turns or is about to turn against your larger investments in longer timeframes and when you find yourself in trouble trying to foolishly do something that is well beyond your skill-level. Learn how to avoid big mistakes and how to turn small, unavoidable mistakes into acceptable profits, which is the difference between being a beginner and a CPT. While maintaining CPT status, slowly work to maximize profits by increasing CPT trade size or by working to reproduce profitable results in a slightly quicker timeframe with tiny size. Rate of Return is a function of time. So once CPT status is realized in a longer timeframe, work to reproduce those results in a slightly quicker timeframes, while keeping the bulk of your working capital in your Optimally Effective Timeframe (OET). This will positively magnify the rate of wealth creation. But this fact is far easier said than done. Earning a better rate of return is going to require a lot of effort, skill development and time; but you can do it, if you are patient, persistent and methodical. In time, you can become a true market professional, which is someone that can make a living off their market wisdom and skills.

  15. Controlled repetition is the best way to grow wisdom and skill. If possible, seek out a mentor or collaboration with likeminded peers. Develop an incremental and iterative trial and error process to figure out what works and what does not. Plan out each trade, trade the plan, and learn from the results. Be systematic. Look for historic fundamental and technical patterns with advantageous odds that plays to your natural abilities and access to information. Like compounding, build wisdom and skill by combining or extending one small successful insight with or on top of another. Employ a process where the mistakes (errors) cost you little or nothing to learn what does not work. You can learn a lot from mistakes. You must pay to play, but you don't have to pay too much. Note that money lost or squandered away by the younger version of you cannot grow to support the older version and is expensive to replace (thanks to the time value of money). Also note that the current market environment is subject to change, just like your abilities. Cultivate the ability to anticipate the changes and take advantage of this natural evolution, which is often driven by bigger cyclical market patterns operating in longer timeframes.

When it comes to trading and investing in the markets, there will be winners and losers. Develop the ability to have the size and frequency of your winners overpower the losses. This is what it takes to be a Consistently Profitable Trader (CPT), and being a CPT is the real key to wealth creation in the markets. However, consistently picking the winners, losers, tops and bottoms is extremely hard, even for the pros. But we don't have to do that to be a CPT. Study investing, business, economics, and history. Lean what works for you. Do more of that and less of what cost you money. Develop an iterative methodical process with favorable odds. Combined that with patience and persistence. These are profitable skills well within our control. But market prices are not. They are controlled by Mr. Market. Wait for him to come to you. Put yourself in positions that pays you to wait and watch, and when Mr. Market shows you favorable prices (trading opportunities), take each that you can afford to take. Just like a casino, games (opportunities) with favorable odds pay well over time. It is generally better to wait for favorable prices. But you have to be in it to win it. Find a reasonable balance between these two competing ideas that plays to your natural abilities. Market prices naturally trade up and down along the broader market trend. Trade in the direction of a healthy broader market trend. Be a buyer near the lower end of that trading range and seller near the upper end. But because favorable prices can become even more so, it is best to scale in and out, thus converting your buy low and sell high prices into two averages that you can manage and optimize. Employ an iterative analytical and trading methodology to grow your skill and savings at a positive compound rate of return. Use this repetitive process to find favorable trading pattern that work for you. Good fortune favors patient trades in survivable investments with healthy trends in longer timeframes. Use a planning and tracking system (e.g., a spreadsheet) and Mr. Market's prices near likely Major and Minor S/R levels to enter, add to, reduce, and exit positions as indicated by your analysis, planning and historic chart patterns with favorable odds that you can learn to see as they develop on the right edge of your charts. Understand that pay rates in life are often a function of specialized skill and effort that you can develop if you work at. If you save enough money and can master these (or your own) profitable market insights and skills, you can create your own market-based retirement business. A business that allows you to work where and when you want, assuming you have enough working capital, appropriate tools and techniques, and adequate access to market information.

Stan Benson