Wednesday, July 08, 2009

When should I invest in a market?

I read lots of financial & economics blogs. There are a lot of good tidbits to be gleaned on these blogs. Some of the more talented writers are Karl Denninger at the Market Ticker, Mike "Mish" Shedlock, Barry Ritholtz, and "Tyler Durden" at Zerohedge. They cover all of the fundamentals of the economy very well. Fundamental analysis is story telling and making assumptions about an uncertain future.

I used to try to trade at least a portion of my money using fundamental analysis. No longer. I have completely switched to mechanical trend following methods. I use no discretion in market entry/exit and follow a fairly rigid set of risk controls.

To answer the question in the headline: Invest in a market when it is going up and get out when it is going down. Price is the only thing that matter because it is the basis of all profit/loss. As soon as emotions are disconnected from the invest/divest decision, an investor can make a logical deduction on the correct course of action.

Rules based decision making is the only method I know of that can automate decisions while identifying opportunities and managing risk while having a statistically based profitable edge.

Economists are highly paid fortune tellers selling a story and want to be right. Traders are realists that follow price action and want to win. Unfortunately, economists tend to make bad traders because by design they introduce bias into a decision.

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