Chapter 3. It’s All Opportunity

Every trader must overcome a certain psychological roadblock before ever making any true progress. That is, every trader who wants to achieve success must accept and embrace this simple yet profound truth: There is no good or bad in the market, simply opportunity. Most people misinterpret the market to be either good or bad as it relates to price action going up or down. If the market advances on a particular day, you assume that the market had a “good day.” Conversely, when the market declines, it is said to have had a “bad day.” If you subject yourself to the ebbs and flows of the tickertape without taking control of your investments, you will naturally agree with this statement because you will see your investments rise and fall with the market (and thus you will feel good one day, bad the other). The problem with this ingrained assumption is successful and consistent traders must never view the market as good or bad, but rather as a world of opportunity. They must seek to take advantage of the price action regardless of the direction. The moment you stop allowing the general market movement to dictate your emotions, you unleash a powerful world of opportunity that just seeks to capitalize on market movement, rather than be subject to the general direction for a particular day.

I was taught from a young age to seek out solid investment opportunities, buy them, and let them work. So, it took me a long time to truly embrace the philosophy that I could make money even in a stagnant or declining market. It wasn’t until I finally removed good and bad from my vocabulary that I unleashed the power I had to take advantage of any situation available to me on any given day. It sounds simple. Ask yourself if you have, in fact, embraced the world of opportunity that comes with price movement, or whether you are still hoping for a general direction, be up or down, to play out. If deep inside you desire the market to move in a certain direction, you will never truly unlock your ultimate potential, and you will therefore limit your trading performance for as long as you hold this mindset.

Most investors would agree that a market has three states of being: advancing higher, declining lower, or moving sideways. Should you approach the market conditioned only to think that making money is possible when a market advances, you are taking advantage of just one-third, or 33%, of the general market opportunities, and are thus subjecting yourself to an immediate disadvantage. On the other hand, if you are open-minded to profiting from price action alone, regardless of whether it is up or down, you place yourself in a much better position to profit because you open yourself up to the entire market on any given day. The trick, of course, is to remove any and all bias from your inner being. The market does not care what you think, nor does it care where you believe it should go. To truly take advantage of the opportunity that is price action, you must not overlay any bias whatsoever; otherwise, you will immediately be viewing the market one way and allowing the good versus bad mentality to creep back in.

When approaching the market, you must ask yourself a few questions. Do you have a bias toward market direction? That is, before even approaching the buying or selling of stock, do you believe the market will advance or decline? Perhaps you are reading a tremendous amount of negativity in the press and, therefore, believe the stock market should be declining. Or maybe you have just heard about great advancements in the health-care industry and so conclude that those stocks will be benefiting greatly. Or maybe you have just enjoyed a lovely dinner engagement where intelligent people working in the financial industry laid out their case for a particular stock, industry, or a market move in general. This is actually the way most people approach the market, and sadly, it is the way most will lose all their investment dollars. Internal feelings, general consensus, and other people’s opinions should never serve as the foundation for your investment strategy. These are all qualitative variables that can be manipulated or skewed to actually fit your own bias. Conversely, a true quantitative system cannot be argued with, and therefore seeks only to capitalize on the opportunities at hand, not on something that might transpire.

I often joke to other traders that if I were trading from a remote cabin, far off in the woods with only my charting software, my performance would improve dramatically. Regardless of how hard they try not to, most traders associate some sort of bias with a stock or industry, and thus encounter frustration and derive poor performance. The truth is that those desiring sustained success must consciously lay any bias down if they want to progress. For example, at the time of this writing, most traders believe that commercial real estate companies are suffering greatly and it is only a matter of time before their stocks experience an aggressive sell-off. Much data supports this view, and intelligent people are paraded in front of the camera almost daily to discuss the imminent demise of these companies. However, the stocks themselves do not yet reflect this widely held belief. In fact, early on in the market advance of 2009, these stocks were acting extremely bullish. Even so, most traders discounted their action due to their industry affiliation. Because so many investors viewed this sector as bearish, believing prices would soon be declining, they missed the opportunity that a significant rise in price actually presented. Although in the future these stocks might, in fact, reverse and plummet, there is great money to be made playing the opportunity rather than standing firm in an opinion or investing bias. Throughout my career, I have learned that most investors cannot disassociate themselves from the actual underlying company, nor from their internal bias about where they believe the price should go. Those who can are already in a much different league than those who cannot. Traders who can think like this, simply looking at a pattern as an opportunity regardless of any other investing bias, will immediately and dramatically improve their results.

In early 2005, prior to my time with Rev, I fell prey to this firsthand, learning just how expensive it can be to hold on to a stock because of strong bias. I rode a position in Winn Dixie stock, all the way into its bankruptcy. I recall the experience as if it were yesterday, remembering how I had done due diligence on the fundamental aspects of the company, believing that they were going to reverse course and become a fantastic investment. I had pored over financial documents, listened to conference calls, and visited stores. I believed I had done all the necessary homework and stood firm as the price eroded before my eyes day in and day out. Despite the declining stock value, I remained steadfast and truly believed that I would soon reap a fortune as others eventually realized what a great value the stock was. Finally, after months of an unending decline, my heart sank as I received word that the company would file for bankruptcy protection. All my hard work, and investment dollars, went up in smoke. After this experience, I vowed never again to lean on any investing bias; instead, I would respect only what the market was telling me.

Before you can truly venture into the world of successful stock trading, you must accept this fact: The market is neither good nor bad; it is just a wonderful world of opportunity. Furthermore, it is not your job to determine where it should go. Instead, you want to humbly seek to profit from whatever direction it moves. That is, you want to embrace whatever may come your way and open yourself up completely to the true opportunities presented day in and day out.