Better Safe than Sorry

Nouriel Roubini who correctly predicted the sub prime crisis is not optimisitic. He has written an article titled “The US and global economic crisis is becoming much more severe in spite of the treasury rescue plan. The risk of a total systematic meltdown is now as high as ever”. This is a long title, and it sumamrises the views of Mr Roubini.

In India, volatility is going up. Historical Volatility (HV) has moved up to 46% from a low of 25% in late August. Volatility is mean reverting. This means, volatility comes back to an average value after reaching extremes. The current 100 period average is 37%. Therefore, a slight decline in volatility is possible. This could mean either a straight line trend, or choppy markets with small ranges – both will lead to a fall in volatility.
Trading is based on rules. Many emails and comments ask this question: how to trade ? The answer is: develop a set of trading rules. Rules should be identified for entry, exit, stop loss, profit target and trailing stops. (profit target and trailing stops are optional, but entry, exit and stop loss are a must). Once you make these rules, follow them with discipline. The profits come by using discipline to follow the rules. There are many ups and downs in trading (whipsaws). Accept that losses are part of trading. For short term traders, remember that most of your trading profits for a given month will come from one or two trades. You trade throughout the month since you do not know which two trades will give you the money.

Finally, ‘Better Safe than Sorry’. Investors should wait for clear signs that the bear market is coming to an end. Once such signs are in place, then go and begin your investment. Till then, keep your cash wih yourself.