With crude oil surging nearly 3 percent and the U.S. dollar falling 1.5 percent, today King World News is featuring a piece from one of the greats in the business discussing Ray Dalio and the key to making money in these markets.
"In trading, you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money." — Ray Dalio in Hedge Fund Market Wizards
April 29 (King World News) – Up until recently (before I finally came to my senses), I lived 30 miles from the Raymond James office, which meant that over the past six-plus years I became very well-acquainted with the traffic patterns that made up my 60 mile roundtrip commute. I knew, for instance, which lanes on the interstate generally moved the quickest over each subconsciously-divided stretch of my trip, and most of the time I would switch lanes when I believed I had a better chance of moving faster if I made the change. It didn't always work, of course.
Sometimes I would merge just as my newfound lane came to a grinding halt, and I would be forced to watch all of the cars that had once been behind me go speeding by. "Why didn't I just stay the course," I'd exclaim, in albeit more colorful language. But I think this is a perfect metaphor for the difference between being a long-term investor and being a trader.
An investor knows his or her destination and just gets in a lane that is heading in that direction and stays there. Sure, there will be times when cars in the other lanes are moving faster, but the investor is not concerned and just remains defensive. Progress is being made over time, and barring a crash, the investor knows that he or she will eventually reach the intended destination. Contrast this approach with the trader, who is constantly trying to be aggressive and move into the fastest lane. He or she will not always time it right, but if things do go well, the trader has the potential to advance very quickly.
I have thought about this metaphor many times over the years while sitting in traffic, but I was recently reminded of it again when I came across the quote above during my third re-read of Jack Schwager's wonderful tome, Hedge Fund Market Wizards. While all of his "Market Wizards" books are filled with invaluable trading wisdom, this insight in particular from Ray Dalio's interview really stuck out to me because I think it not only underscores the important difference between an investor and trader, but also illustrates perfectly how one must trade in this current market environment.
Stocks continue to move all over the place, so if you have decided to be a trader, you must carefully balance being aggressive and being defensive. Yesterday looked a lot like "stop hunting" to me, as many traders probably had stop-loss orders placed back within the triangle pattern we have discussed recently. The S&P 500 spent much of the early part of the day taking out those stops before moving back higher, hopefully setting us up for more upside.
But, of course, if you are an investor, than you really shouldn't be worrying about the overall market and all of this recent noise. The long-term uptrend remains intact and until this changes, you should be sitting back and relaxing while you watch all of the trader cars anxiously shift gears in a race to get ahead. ***ALSO RELEASED: My "Hate Mail" Indicator Says Major Market Turn Is At Hand CLICK HERE.
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