can we avoid
large losses in the markets? How can we protect our investment capital?
What simple steps can we take to stay on top and be in control of our
the onset of the now infamous bear market of 2008+, many investors lost
a lot of money. Some of those investors managed to recoup their losses
fairly quickly (amongst the lucky ones), with many others facing losses
that lasted for years. And some of these losses impacted adversely on
retirement plans, causing many to change their plans and return to the
active participants in the markets didn't lose much at all, or perhaps
lost nothing, because they could see the likely bear market coming
(just like many did in 1987).
Despite the views of some of the respected finance industry
professionals, this bear
market was foreseeable.
underlying opinions and emotions of all market participants
are summarised in the price charts.
Every price chart tells a story.
It pays to understand the stories in the price charts.
more about technical analysis
order to foresee an oncoming bear market, and respond to it
appropriately, an investor (or trader) needs to have a mindset
with some key characteristics. These are described as follows.
The basic approach
chips can disappoint - There is no strict definition for
the term blue chip.
Many so-called blue chip
stocks are not what they are cracked up to be. Too many blue chip stocks
fell significantly during the GFC. Some took a very long time for their
share price to recover, causing a serious opportunity cost for many
investors. See the ASX definition of the term blue chip,
more on the real truth about blue chip stocks, they can be
- A bear
market or correction comes around too often - Bear markets
and market corrections come around at least once every four
years. And some of the falls of the market index, and many of the
underlying stocks, can be a lot more than 10 percent, and even a lot
more than 20 percent. And they can take many months for the share price
to recover to new highs. It is very important to realise this. Not
convinced? See information about the crash
of 1987 that took almost 10 years before new highs were
achived, and about the 2008
GFC bear market. If only we could avoid some of this capital
destruction (see the next two points).
preservation is paramount - During a bear market it is
possible to lose 50
percent of our investment capital, and more, and to not see a recovery
for years. Given that these events do
happen, it can be very useful and prudent to utilise strategies to
hard-earned investment capital. Many successful investors consider that
capital preservation is paramount.
- It can
be very useful to be able to spot an approaching bear market
- There are ways to spot an approaching market correction,
or bear market. Some of these approaches are actually rather simple and
straight forward, but they rely on the ability to understand the
stories in the price charts. See details about Weinstein's
approach, and chart indicator
analysis is not essential - It has to be said that many
investors (and traders) in the markets are successful without any fundamental
analysis. At the extreme, many of them would declare it a
total waste of time - they are entitled to their own opinions. Many of
the people who utilise fundamental
analysis enjoy the process of researching and analysing the material -
like a hobby or other pleasant pastime. So we should not detract from
that. But let it be said that many successful market participants use
very little or no fundamental analysis at all - and they can be very
- You CAN
time the market
- Many finance industry professionals
declare that it is not possible to "time the market". They state that
it is "time in the market" that is more important. Well, many thousands
of market participants can successfully time the market, so are they
lying to you? or are they ignorant of the techniques? There is no other
explanation for their incorrect statements. A basic understanding of
how to read the price charts is all that is needed (more
is a precious and invaluable tool - If we want
to preserve our capital and protect it from the ravaging of a potential
bear market, then it is imperative to have some strategies at hand.
Some investors like to hedge their portfolio utilising options, or
derivatives. However, a much simpler approach that requires less time
to achieve, is to be comfortable in liquidating some of the portfolio
at the appropriate time. If a share price is falling too far, then we
could liquidate a portion of the position to capture and lock-in some
profits, or we could totally liquidate the position. The simplest and
most effective approach is the Stop
Loss method. See more
time - We don't
get anything for free - and so it is with
our investment activities. Our investment positions do require at least
a little monitoring
and processing to keep them healthy. And this boils down to allocating
some time to do this, and having a regular routine to monitor them and
take relevant action. Allocating appropriate time is very
important. It is very dangerous
to simply set and forget. But we should also be mindful about wasting
time on unproductive activities. See more information about balancing the time on research and investing.
money and risk management - There are a number of basic
money management and risk management strategies employed by successful
market participants. See details about risk management.
details on the topics mentioned here can be found in Brainy's eBook
(PDF) articles, and in other web pages in the Toolbox (some
are reserved for Toolbox members). See the Toolbox
Master Index for
|Robert writes information from time to time about
the market and investing. If you are not a
Toolbox Member, you
register to receive useful free information as it is published.
Privacy ensured, unsubscribe anytime.
the Testimonials - the things that people say about the
Toolbox and more.
The toolbox is an arsenal
of weapons to help you tackle the share market.
See a list of contents on
Brain provides various support to both new and
experienced traders and investors.
is Robert Brain?
And whatever you do,
beware of the sharks in the ocean!
The opinions of market participants
are captured and available in the price charts.
It pays to be able to read the
stories in the price charts.
(weekly price chart of CBA from October 2013
to May 2014 - see more details)
The charts are very useful
As much as many investors might feel uncomfortable with this, the price
chart is a very useful tool because it summarises the opinions and
emotions of all market participants. And this understanding can enable
us to take advantage of the situation.
price chart is very useful
- As we have said above, the underlying opinions and emotions of all
market participants are summarised in the price charts. Every price
chart tells a story. So it is very useful to be able to understand the
stories in the charts. This ability and competency is known as Technical
Analysis. The sample chart at right contains just one example.
confirmed price trend is likely to continue
- The share price on the price chart can be in any one of three
different states - either an uptrend, a downtrend, or in no trend. A price trend
is simply defined as a series of higher peaks and higher troughs on the
price chart. An uptrend on a chart can often have a rising straight
line drawn under the price action - which looks like a rising floor for
the share price. This is due to broad general agremements amongst the
market participants as to the increasing fair value for the
stock. It has been researched and concluded that once a price trend is
under way, it is statistically likely to continue. See
more information about trends.
is an invaluable ability - Because of the previous item
about price trends,
the simple art of trend-spotting is very useful.
Moving Average can help
- The Moving Average curve on a price chart can tell us a lot about
what is happening to the share price, and it's general tendency to
change. See a simple implementation of the Moving Average with Weinstein's
for price support
- This is one of the most basic principles that tells us a lot about
the views of the majority of market participants. When they tend to
agree that a stock has an upper or lower limit to it's fair value, this
is reflected in the horizontal levels of price support and resistance
on the price chart. The price approaches one of these levels, and often
tends to bounce away from it due to the general opinion about fair value. See a sample of price support and resistance levels in the sample chart above, and read more details about support and resistance.
for a chart pattern - As time goes by, the opinions of
market participants regarding fair
for a stock can progressively change. When this happens, the extremes
of price tend to lie within a price range. And this price range can
vary over time. If we draw a straight line above the price action and
another below it, these two lines can often form a chart pattern on the
price chart. See more details.
- One or
two chart indicators can assist
- The field of technical analysis includes an arsenal of tools to
assist the analyst. This includes a large number of chart indicators to
help understand more detail about the price action, including the
influence of volume. See more details about chart indicators.
more information on these topics, refer to the web links above.
This is one of the
many tools in Brainy's Share
The information presented herein
opinions of the web page content owner, and
are not recommendations or
endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor
should be engaged.
Copyright 2013-2014, R.B.Brain -
Consulting (ABN: 52 791 744 975).
Last revised: 30 September, 2014.