Opening Position
December 2007
On October 19, 2007, 20 years after Black Monday, the Dow Jones Industrial Average lost 366.94, a 2.64% drop. Although that's only a fraction of the fall compared to what happened two decades ago, it's only natural for traders to draw parallels between the markets 20 years ago with those today. After all, patterns recur in the markets. If you can remember back that far, 1987 started out as a great year for equities. There was an extended period of euphoria, but at some point people got nervous and decided to sell off their holdings. That euphoric feeling began to dissipate and then, one day, the Dow dropped 20%, the worst fall in exchange history.
Was there any way to predict this crash with 100% probability? Technical indicators are able to identify trends and reversals, but when it comes to such extreme events, there really is no easy way to see it coming. This year, some people made a statement that the markets would crash the following trading day. Come to think of it, I'm sure many did, given that it was the 20th anniversary and an option expiration day to boot. And I can guarantee you that those who did predict the market drop this year went around telling everyone they knew or didn't know that they had it all figured out.
But what about all their losing trades or bad trades? I wouldn't be surprised if those conveniently slipped their minds. That is precisely what makes trading so dangerous. A good trader needs to remember those losing trades and recognize those winners, even those that happened by chance. A good trader needs to realize that before putting on a position, anything -- external or otherwise -- could result in a losing trade. If you forget that, your trades could blow up in your face, no matter how sure you are of your trading system. Trading is not about how much you could win. It's about protecting yourself and your assets.
Stock market crashes are extreme events that happen rarely. But they can happen anytime, and when they do happen, they catch you by surprise. The best thing you can do to protect yourself is go into a trade with an open mind. Expect the worst and figure out how you can protect yourself in the event the worst did happen. That's the only way you can maintain your sanity. And with the holiday season upon us, it's the best gift you can give yourself and your loved ones.
Happy holidays!
Jayanthi Gopalakrishnan,
Editor
Originally published in the December 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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