I was browsing the web tonight looking for other Forex blogs, and I found http://www.forexproject.com/ ; Trader Rich has been blogging since 2005 and is posting his real results with Forex trading. His site is open, honest, and refreshing. The truth is that this trading thing takes a hell of a lot longer to master than you might expect. I was trading forex for 12 months with absoultely horrible results, and I nearly threw in the towel. There was something about almost quitting that changed my perspective on the situation, and somehow, if only indirectly, allowed me to stumble upon the successful system that I call the Cable Glider…a system which has re-couped my inital losses and then some, all within the last 4 months.
No, I’m not saying that 12 months or 16 months or any set period of time is “enough” to become a success. The point I’m trying to make is that there is a high level of committment and perseverance required in order to develop and implement a trading system that works for you. Successful traders pay a tuition in the form of losses early in their career. If they are properly evolving as traders, they can reach the proverbial light at the end of the tunnel, and step into a world of consistent trading success. The key is to stay in touch with one’s “evolution”.
If we make the same dumb mistakes year in and year out, we are destined to perpetual failure. The next time you tell someone that you have 10 years experience doing one task or another, stop and think about whether or not you learned anything new in years 2 through 10. If the answer is no, and you are still failing, quit the game, and save yourself some wasted time, money, and energy. If, however, you are committed to the path of personal growth and continual evolution in trading attitudes and methods, AND your evolution is validated by decreasing losses and hopefully increasing profits, then never lose faith that you are on the proper path to your goal.
I realized that I’ve been taking some ignorant swings at “Random Walk” and the Efficient Market Hypothesis. I hadn’t really read anything related to random-walk since Economics 101. This realization, coupled with the fact that I literally live in the shadow of a wonderful public library that I have NEVER used, led me to take the short, direct walk to the library to get the book and review it.
All in all, the book is a good read and a valuable read in the sense that stock investors who take its recommendations to heart are far less likely to shoot themselves in the foot by overtrading, chasing performance, etc.
The basic premise of the book is that price movements in the stock market resemble a random walk, and that past price movements are not predictive of future price movements. The book does make passing mention of a LONG TERM UP TREND in equity prices roughly equivalent to the long run rate of earnings growth, but rather curtly declares that transaction costs are prohibitively high, and therefore, short-term trend trading is not superior to a buy and hold approach. In fact, it categorically goes through most widely followed methods of stock picking and explains why these are inferior to index investing.
Get it? Two things : Future stock prices cannot be predicted, and nothing beats buying and holding a diversified portfolio that is primarily made up of US stock index funds.
Here are some important limitations to consider, however.
The conclusions about efficient pricing and long term upward bias apply to the STOCK MARKET ONLY. Furthermore, while the book explains why fundamental and technical analysis “do not work”, it pre-supposes that an inability to predict the future movements of stock prices necessarily means that one should not be able to outperform the market over a long period of time. Keep in mind that the book had already acknowledged the inconvenient trend phenomenon but managed to “normalize” it away.
My own evolution as a trader has taken me away from active stock investing. In fact, the relatively small percentage of my assets that are currently held in stock funds are actually invested in index funds. Why? The risk-reward relationship for successful stock picking is relatively small due to the high costs and/or inavailability of high degrees of leverage. I personally find my skill set more suited for forex trading, but this is by no means a recommendation that everyone run out and start changing their dollars for euros and pounds and whatnot. Forex trading is purely speculative, and speculation and investing are really two entirely different animals. Month after month, my forex trading results are convincing me that speculative, short term trend following in the forex market can and does produce returns that are not only outstanding, but also uncorrelated to the returns in my stock portfolio. This is diversification at its best.
Despite my rather facetious rant against index funds in a prior post, the vast majority of us will be investing in stock funds via tax advantaged accounts like IRAs and 401k’s…for this purpose, Random Walk’s advice is practical, easy to implement, and perhaps the best way to get rich slowly and enjoy a financially free future.