Don't get complacent

The markets are the worst and the best teachers. Worst because there are no easy or free lessons, everything comes at a price. A price that can sometimes be so high that we can't even afford to put in practice the lessons we have learned from the markets. The best teacher because they never allow you to become complacent. The market keeps you on your toes. The day you relax or get complacent is the day you suffer heavy losses. The day one thinks that one has it all figured out, is the day you are finished as a trader. Doesn't the fact that the market forces you to keep on learning makes it the best teacher?

All this got me thinking about the month that we have been having. I guess we have had a couple of down days so far, or maybe three at the most. The blogosphere and twitter is filled with talks of Santa Claus rally. Surely nothing can go wrong, right? Wrong! I am not saying we go down from here, all I am saying is don't get complacent. Don't take things for granted. Don't let mistakes creep into your trading because the market is in a very forgiving mood right now. This reminds me of a post I wrote about the benefits of learning to trade in a bear market rather than a more forgiving bull market. Come to think of it, I had written it in last week of March and looking back, the April top wasn't very far off. Below is a copy of that post which I believe is very relevant to the market conditions we face right now. Let's not forget the lessons we all learned from the bear market.

Here it is:

Markets continued going higher. 

That's it. That's all I have to say about the markets today as far as the general market is concerned. But that doesn't mean I don't have anything more to say today. Read on dear readers, read on.

Are you scared on how this epic low volume junk rally will end? Now, I am not saying go and short this rally. Anything but. I don't think anybody has a clue when this rally will end. But we all agree this rally will end sometime, right? Its what follows this what troubles me. Let me explain.

I don't follow too many blogs but a common theme that has started developing in the comments section of many of the blogs I do follow is a lot of new faces, and in some cases old familiar ones too, coming on board and saying that pick any stock and let it run. In some cases, I see the traders getting stopped or taking profits being mocked at by these "experts". Their rationale is the market is just gonna go higher. No doubt, these new traders have enjoyed considerable profits in the last few weeks and I congratulate them on their success and wish them well. But at the same time, I am confused whether I should laugh at these experts or feel sorry for them. Being the kind spirit that I am, I choose the latter. I feel sorry for these new traders as we all know how this story ends.

I started short term trading around one and a half years ago, right in the middle of the bear market. I started short term trading after an unsuccessful attempt at buy-and-hold "investing" when the market crossed 13000 and everybody calling for 16000. We all know how that story ended. You can read all about my early exploits in investing over here. The point is I learned my trade in the worst possible market conditions. I am still learning and nowhere close to being the trader I want to be and the trader I know I can be but I learned my basic lessons in a bear market. 

I certainly did not appreciate being a child of the bear market back then, but I certainly do now, especially when I see all these exuberant newbie traders who are children of the bull market. I learned the importance of keeping stops the hard way as I saw stocks fall to unimaginable depths all around me. Imagine not having kept a stop loss on AIG! I learned, as a short term trader, not to hold any stocks through its earnings report, no matter how confident you are about the stock. Its something that I still practice today, even in a bull market, as it becomes a natural defense mechanism when you see companies come out with horrible numbers one after another. Bear markets teach you this. I learned not to trust any company. No matter how big or reputed the company, as a short term trader my goal is just to take my profits and move on. Imagine trusting Lehman. Bear markets taught me this. I learned to take my profits, or at least partial profits, whenever the Stock Gods smile upon me. I have seen too many massive gap down days not to have learned this. All the above knowledge, courtesy of the bear markets.

I am not saying all the above was easy. Exactly the opposite in fact. Markets are the best teachers, but also the harshest ones. You get to learn a lot, but all this comes at a price. A price you see reflected in the bottom line of your trading account. But as long as one has the right attitude and is ready to learn, you DO learn. The markets are there to teach us everyday. I still make basic errors but the lessons from bear market are, and will always be, ingrained in my mind. Does learning in a bear market have any drawbacks? Sure! Take my example again. I have a hard time letting my stocks run, as I always fear the worst. Because the worst is all I have seen. 

But give me the bear markets as a teacher over the bull markets anyway. Take the newbie traders that made me muse on this topic. The bull market is lulling them into a fall sense of complacency. It is showing them the door to riches, to riches they never thought were possible. It is telling them trading is the easiest thing in the world. It is telling them just buy a stock and keep it, because even if it goes down in the immediate future, they all go up in the end. We all know how this story ends. The same way it ended in 2000 and 2007. Eventually, most of these traders will too learn. But only after the bull market has played them for a lot. Bear markets just give you the harsh lessons straight up. Following a similar line of thinking, I feel it is much better if a new trader starts with a loss rather than a gain. 

I never thought I would find myself saying this but I think I will drink to the bear markets tonight. Thank you bear markets! You sure were one hell of a bitch but you were a damn good teacher. Cheers!