Ask Colin

I thought I had trading sown up. From May 03 up to November 03, I couldn't help but make money. Then it all dried up from November 03 onwards. My dilemma is whether I somehow changed my trading style and am not aware of it, or is the change in market conditions my difficulty?

I thought I had trading sown up. From May 03 up to November 03, I couldn't help but make money. Then it all dried up from November 03 onwards.My dilemma is whether I somehow changed my trading style and am not aware of it, or is the change in market conditions my difficulty?

There is an old saying on Wall Street that is quite confronting, but true: "Don't mistake a bull market for brains." One of the worst things that happens to gamblers is that their first bet is successful. The same thing can happen to traders. They start in a bull market and make money easily. Then the market changes and they find out how difficult the game is.

If you look closely at the chart of the All Ordinaries index, it should be obvious that the character of the market changed from November onward. From March to November it was all uptrend, with only the most minot of corrections. However, since then, there have been several sizable corrections which have asked very difficult questions of traders and investors. So, the first answer is that it is probably that you have not adjusted to the market.

Yet if you look at the chart of the All Ordinaries Index, somewhat differently, you should see more detail of the character of the market. The uptrend started in March 2004 with a very rapid rise. Starting from April 03, draw a linear regression line on the chart. Draw parallel lines through the peaks and the troughs furtherest from the regression line. I have done this a few times in my columns in BRW magazine. It should now be obvious that the trend has been remarkably consistent. This suggests that something else has changed in the structure of the market. I think that one important thing has been a change from small and resources stocks to larger stocks. So, the second answer could be that you have not kept your focus where the action is. Frankly, I think that my own return has suffered for the same reason, though I am still making profits and longer term, my focus on smaller companies seems to pay off. Your extended question suggests that you can see this now. Maybe you just did not see it early enough or did not have the confidence to back your observations.

Keywords: