Chapter 4: Continuous Advice

KEY POINTS TO REMEMBER

Continuous advice doesnt work.

Bollinger Bands can help find setups with good risk-reward characteristics.

Indicators can help.

Technical and fundamental analysis can be combined to your advantage.

R

BE YOUR OWN MASTER

Throughout this book many different concepts are presented and rules given. Time frames are inferred, indicators are recommended, and approaches are discussed. In some places the recommendations are quite specific and in others deliberately vague. All have one thing in common: You must suit yourself if you are to be successful.

One investor will be able to withstand only very small losses before having to exit, whereas another will be much more tolerant of short-term volatility in seeking intermediate- or long-term gains. Currently in vogue among momentum investors is a rule that suggests exiting if a 7 or 8 percent loss is encountered. Nothing could be more absurd, for investors must determine for themselves the discipline they must follow. While an 8 percent stop-loss rule might work well for some investors, it might keep others from making money at all, or even cause them to

Chapter 5: Be Your Own Master

lose money. There are no ironclad rules that work across a broad spectrum of investors.

Here are two examples that demonstrate how investors bend existing frameworks to suit their needs:

A Web site I created that analyzes stocks, www.EquityTrader.-com, presents Performance and Potential ratings. The Performance ratings are risk-adjusted, front-weighted, historical performance measures suitable for intermediate-term forecasting based on daily charts. The Potential ratings are derived from a fuzzy logic model employing both technical and fundamental rules, and are shorter term in nature-more traders tools than investors tools. Communications from users suggest that they are picking and choosing among the various EquityTrader (ET) tools, in some cases combining them to create unique approaches to using ET for profit. That is exactly the right idea.

Futures Truth, and other organizations of similar stripe, tests and reports on the profitability and characteristics of many trading systems that are offered for sale to the public. Users who buy those systems most often find that their results differ from what they had expected, sometimes markedly. This illustrates an old truism. Teach a dozen investors a trading system, and when you come back a year later, youll find a dozen systems. For various reasons the users will have tweaked-perhaps massively-the system to fit their own needs. Thus virtually any system can be taught widely with little fear of its effectiveness being diluted.1

To be successful, investors must learn to think for themselves. This is true because they are unique individuals with varying goals and differing risk and reward criteria. Investors must fashion an investment program that not only is profitable, but is one they will be able to execute. No system-however profitable-will work for them if they are unable to follow it. The idea that only a custom-tailored approach has any real chance of success is as close to a universal truth about investing as it is possible to get.

Independence and independent thinking are the keys. It is very comfortable to go with the crowd and do as others are doing-or as they tell you to do. Yet this is a road fraught with peril. Consider Robert Frosf s "The Road Not Taken."

Two roads diverged in a yellow wood, And sorry I could not travel both