Grand Victory: Lessons for Traders

The Delhi elections have given a truly spectacular victory to AAP (Aam Aadmi Party). Winning 67 out of 70 seats is probably a record, unlikely to be repeated by anyone.

There are many lessons for traders from the career path of the AAP.

1. AAP was created to fulfill a burning desire for an anti-establishment political group.

Lesson:
People should become traders when they have a burning desire to trade. Wanting money is NOT a burning desire.  Trade when you want to fill the need for trading, not because you want money.

2. AAP was suddenly very successful in the 2013 elections. This was beginners luck.

Lesson:
Many traders make money at the very start. This is beginners luck, but the new trader thinks it is his skill.

3. The 2013 election victory of AAP gave them the false impression that they were invincible. This caused two mistakes. First, they abandoned their government. Second, they contested 400 seats for the 2014 Lok Sabha election. The result was a catastrophe. AAP was almost finished.

Lesson:
When new traders taste profits, they start flying. They increase volume, add leverage and feel they can do no wrong. The result is almost always a disaster. The trader loses so much money that he goes out of the trading business.

4. From the ruins of disaster, AAP regrouped. They decided to focus only on Delhi. They refused to participate in the many state elections that were held, including Haryana.

Lesson:
Traders, MUST focus on the markets. They should determine the type of trades they are comfortable with, then forget about all other trading opportunities.

5. The 2015 elections have given AAP a victory even they could not have imagined. What the party did was to follow their plan, and, leave the results to God.

Lesson:
Traders should never look for earnings. What they should do is follow their plan and leave their results to the market. Often, they will be rewarded many times more than they ever imagine.

When does a correction become a down trend

In any trend, even the strongest, a correction is as inevitable as ‘death and taxes’. When Markets are moving up, at some point, they pause, consolidate and also move down. If we are confident that the primary trend is UP, then the down moves are considered to be corrective, which means that these moves will be shallower than the up move, terminating sooner than later.

However, for traders with a firm belief in the primary trend, a deepening of the correction starts raising questions on the validity of the primary trend itself. At what point does the correction start suggesting a change in trend?

Like most analysis in trading, there is no straightforward answer to this. A primary uptrend reflects a series of higher highs and higher lows. At some point the pattern is broken if the market is having a deep correction. When the pattern is broken, it is wise to step aside from buying, wait for the correction to be over.

Traders should not be in a hurry to call for a change in the primary trend. A long term trend can go through many corrections which will appear to have changed the main trend, but are actually just deep  retracements.

For investors, when you get a sense of a deep correction, step aside and suspend most of your buying. For traders, begin considering counter trend positions with smaller size and volume.