A bad market can drive many investors and traders out of steam. No new trades, fear of entering the wrong stock again, all stocks in our portfolio are "red". The bear market in the stock market not only sent stock prices tumbling but also scared away many retail investors. Some are worse, trying to beat the bear market by buying more. Finally, why is it so difficult to invest in the stock market?
Try to finish reading this blog to learn more about why we get lost in trading and hopefully our post will help you get back on the right track for success in the stock market.
We will also share with you the solutions for better trading in the stock market using our own developed Operator Analysis. Our analysis looks at the price and volume of operator/ big boy deals. Knowing how to interpret an operator's trades is almost like having an instant "insider" on the stock. From the transaction, we can understand the next possible actions of the operator so that we can execute according to their intent. By understanding this, we'll know the right times to enter and exit stocks, no longer needing to get bogged down in a bad market.
Before we look into practical ways to find the right stocks to trade, we need to understand WHY we get lost in the stock market?
Difficulty in Managing Your Position
- Hope analysis
Whether you are applying techniques or basics, or even if you are a beginner in the stock market, most of us have no idea what to do and what we can do to take control of our trading. All you can do is wait for the price to rise to your desired price, profit target or stop loss, and you can learn how to predict these targets from traditional technical analysis. Every day hope that the stock price will not fall to your stop loss point, and hope that the stock price can reach your profit target faster.
Have you ever experienced a stock price move halfway towards your profit target and start turning towards your stop loss? Watching unrealized profits dwindle every day and ultimately cut losses? If you've ever come across this in investing, it's clear that we don't know how to see a reversal coming and profit early before prices fall further. Traditional technical analysis only tells us to wait and execute when the price reaches the expected profit target or stop loss, it does not tell us what to do when the price does not rise to our profit target.
Resistance breakout is a common pattern for many traders and investors looking for a suitable stock entry. We believe that many of you have experienced the above situation in the picture, when you break a large entry based on resistance, the price retraces and hits your stop loss, and then the price bounces back again. This is where you start to feel lost, why follow a trading plan and still miss the opportunity? Should I cut my loss points lower next time? But if you lower your cut loss point, it will incur higher losses.
The problem is not the cut loss point, the problem is that we cannot determine through traditional technical analysis that the price is retracing. Because technical analysis only shows a general understanding of the current price movement, it cannot tell us what will happen to the stock price. That's why you don't know that a retracement is coming, all you can do is wait for the price to hit your take profit or stop loss.
This is why we no longer use traditional technical analysis because it gives us too little information to exit at the right time.
Sign #1, Not disciplined
- Follow trading plan but missed out on profit opportunities,
- Bend the Trading Rules, leads to more losses.
One of the biggest confusions investors have is that they don't know when to change their trading plans and when not to change them? Like the example above, they followed a trading plan to cut their losses, but the price then bounced back, up 62%. The pain of missing out on potential profits is far more painful than stopping losses prematurely.
Then you will start lowering your cut loss point below the usual percentage for your next trade. Then, since those stocks are more volatile, it hits your cut loss point again on the next trade. By constantly tweaking it, you'll find that your risk and reward don't match up with higher cut losses per trade. Then you get confused and don't know when to lower your cut loss and when to stop it? Because you are worried that the price will rebound after you stop, but if you don't stop, the loss will be huge. So, what's the problem?
In summary, we can identify the factors that cause investors to hesitate when stopping losses:
- Apply system trading plans in non-system markets.
- Calculate cut loss points based on our expectations for all trades.
Applying a Systematic trading plan in an unsystematic market
Stock prices don't move in a systematic way, you can only base them on formations or indicators that come in and out. If it does fluctuate systematically, all of us would easily profit in the stock market, and when the stock price follows traditional technical analysis, it is there to lure us into the market and get operators to sell their shares.
In addition to the above, the trading plan or analysis that many of us apply doesn't tell us what to do when the price reverses halfway through. Always enter the market when the signal comes out and wait for the price to hit the take profit or stop loss point. What if the price hangs midway? Can we make a profit before the profit target? How do we know the price won't hit our profit target? We cannot find the answer in traditional analysis.
Cut loss point calculation based on our own expectations for all trades.
Each stock has different volatility, and if we use the same percentage to cut losses on all stocks, the price of stocks that are highly volatile will reach our loss-cutting points more easily, and some less so, but it is possible to incur higher losses in these volatile stocks.
We need to have the right loss-cutting rules that can be applied to different stock price movements. Also, normalize the loss for each location. This can be done with proper position sizing and different cut loss points for different stocks, needing to know at which price the operator of that stock will continue to drop in price.
You may watch our video on YouTube to find out more about the position sizing we apply in our trade: https://youtu.be/ebeovsGZcA0
Sign #2, Inconsistent Profit
- Don't understand the price movement
Making consistent profits from the stock market isn't just about how much profit you can make. One of the very important factors that lead to our consistent profits in the stock market is knowing how to protect our profits when the market is bad, which is often overlooked by many traders and investors.
It is important for you to know how to protect the profit that you have made in the good market. You could make 30% to 50% in a few months of the bull market, but you could be losing 50% of your total fund in a few weeks during the bear market.
Example: You have RM20,000 in capital and gain 50% in a bull market, raising your total capital to RM30,000. But when the market turns bearish, your total capital will lose 50% to RM15,000. When the next bull market starts again, you have gained another 50% and your total funds have now accumulated to RM22,500. Then you lost 50% in the bear market and the total capital is now down to RM11,250.
Can you see your fund is getting smaller with each new market cycle? While the profit and loss of your bull and bear market is 50%, but, why is your capital decreasing? The reason is that the 50% loss of RM1 is RM0.50 and the 50% gain of RM0.50 is only RM0.25. Your return in value is not enough to cover losses and increase profits. It appears to us that we are making a profit, but it is not.
But we're not arguing about using percentages and numbers here. What we want you to notice is that the bull will not stay forever. There will always be bulls and bears in a market cycle, just like day and night, sun and moon, male and female, or yin and yang. That's the nature of the stock market, operators bid up prices to attract retail investors, and when retail investors come in, they sell stocks, causing prices to fall.
Since this is a cycle that we cannot avoid, we need to learn how to recognize that the next cycle is coming or the current bull cycle is coming to an end. However, using traditional technical analysis such as support line breaks and bear market indicator signals is always too late to tell us where the market is changing. In fact, it will only signal to us when the market has moved (support line has been broken, MA death cross when the price has moved down). It seems that traditional technical analysis is more about letting us know what is happening now than telling us what is going to happen.
Above image, the previous low as a support line kept the investors' high hope and holding on to their losses.
Therefore, it is not entirely your fault that you cannot protect your profits from a bull market. Part of this is because the analysis we apply in the market does not allow us to know that the bull cycle is coming to an end. Traders and investors still enter the market the same way and get caught in a bear market.
There is a way to know a market trend reversal before it happens. We just need to understand when operators in the market attract buyers to sell their shares for a profit. The reason the market goes down or up is usually that most of the operators in the market are doing the same thing at the same time. Some of them didn't sell because their bids weren't high enough to successfully attract enough buyers to make a profit.
This is how we generally avoid entering or holding any stocks until the market crashes. You can watch our market outlook on our YouTube channel to see how we alert our subscribers before the market changes.
If you want to know how to spot market reversals better than many other retail investors or news, you cannot apply the same analysis as them because you will only get the same results in terms of trading performance and analysis results. We all study the same textbooks in school, but why do some achieve more than others? Why do people who don't read the same textbook outperform those who learn from it?
Because learning from the textbook itself is like, "We know what we know, but we don't know what we don't know." We all know that many successful people drop out of school doesn't mean they stop learning, they pursue learning through questioning, practice, and trial & error, which is not taught in textbooks. This is why they are able to learn more than others who learn from textbooks or case studies. These people are case studies in themselves.
To learn how to consistently profit in the stock market, we need to have knowledge outside the books, far from what 90% of investors know. We need to understand that the true pricing mechanism of the stock market is not just drawing lines, setting indicators, or past financial results. We need to know how the masterminds behind the stock market work. Then, before the share price rises, we will know when the price will fall and when to enter the market.
Sign #3, Unwilling to Cut loss
- Hope for rebound
- Painful to cut loss
You may recall that you made many profitable trades, but your capital did not increase. This is because of the fear of losing profits from previous trades, you fail to secure profits and the trade turns into a loss. So, you set a fixed profit target, maybe RM0.02 or RM0.03 profit. But you let your losses run because it's too painful for you to reduce the huge losses you incur. You hope that one day the price can come back to your breakeven price, making it less painful to exit.
This way of trading is like trying to pour water into a cup with a hole in the bottom that you can never fill. Because your losses are huge and increasing every day, no matter how much you can profit from a trade, you will never profit from the stock market.
To solve this problem, we need to get to the bottom of our emotions and get to the root of our fears. Find out why it is so hard for us to stop losses and so easy to take profits. Most of us have the same fear, which is the Fear of Losing!
Why the more we fear losing, the more we will lose?
The seed that makes us fear losing is trading more than our emotions can handle. When we started trading, we didn't expect losses because we were told to diversify our funds into the stock market to generate more passive income. So we enter the market based on how much money we want to make each month and deposit the amount of money we can potentially generate each month. However, we ignore or refuse to believe the fact that the profit we can make, depending on the amount of money invested, maybe the loss we may suffer each month!
Suppose you want to earn RM5,000 per month with RM200,000 capital, which is only a 2.5% return, not so greedy. But you can also lose - RM5,000 or more per month, which can easily rise to -20% (RM40,000) in a bad market. Is it too much of a loss for you? You just can’t click the sell button for a losing RM40k trade. That's why you can't cut your losses, you're trading more than you can handle.
Let's take it to step by step, start small, and learn how to navigate the stock market first. Get used to the market and learn the right way to trade the market before going big. By managing your initial capital, not only will you manage your risk exposure, but it will also help you manage your trading emotions more easily.
Sign #4, You don’t understand the market
- Understand the Gold Mining, do you know how to mine the gold?
- Knowing when the best time to enter is telling us where the gold ore is!
- TA teaches you to understand the mining tools ONLY. [only tells us this piece of land has gold but doesn’t tell us where it is located.]
You have learned from the gurus and speakers the analysis of all the different strategies you can find in the market. But when you're trading the stock market, you're still confused and nothing seems to work. Let's go through traditional analysis to find out why it is not a good analysis for traders.
Academics use Technical Analysis; True traders follow the big boys.
Here are the characteristics of Technical Analysis based on our point of view:
Market perspective: Assume all market participants (including retail investors) have the same price expectation.
Looking at how indicators and chart formation are interpreted, TA usually assumes that everyone in the market is going to sell or buy at a certain price, A.K.A. resistance and support. If this is the case, where do these traders or investors get the reference price at this resistance level to let us sell the price down together or let us stop selling at this price level? One might argue that this is based on the intrinsic value of public companies. There is ample evidence that stock prices are moving according to the big boys' expectations, not their current intrinsic value. A great example of tech stocks and some underperforming companies may see their share prices soar higher than others. Don't forget those "funded missing" companies were later reported, and prices fell sharply immediately after the news. Investors don't have enough time to shake off bad news.
If this so-called “market” knows when to sell & when to support the price, why don't we get these reference prices as a support & resistance rather than following them after the resistance & support lines formed?
It seems that traditional TA is not enough to help us determine the best time to enter the stock. Instead, it became an analysis that trapped many retail investors in the stock market, where both resistance and support failed.
Perhaps back in the days when information wasn't transmitted in such rapid stages, all these chart patterns and indicators were good timing for entry. But it's not that useful anymore, and it's become a trap for investors who use it.
Stock Market = Gold Mine
We all know we can profit from the stock market, but we don't know how or look like we know how because of our tools - traditional technical analysis and fundamental analysis. Traditional technical analysis and fundamental analysis are more like tools to tell us that there is gold ore in this land. But that doesn't help us pinpoint the exact location of the gold ore.
Traditional analysis is more of a tool to tell us that this spot is being mined by others. But most investors will think: Wao! Someone just dug a tunnel for us to mine gold! In fact, that's just wasting your time continuing to mine the gold you wish the previous miner had left behind.
Knowing traditional techniques won't help, we need advanced tools to tell us where gold ore is, when is the best time to mine gold, and the best time to stop mining the same location and look at other gold ore locations. To do it in the stock market, we need to know the current operator/ big boys’ trading model, they are gold ore.
Why Operator Analysis
This is our analysis based on years of trading experience in the Malaysia stock market. Study the operators' prices and trading volumes to understand their trading patterns and price movements before they mark up and mark down. Most importantly, the timing of entry and exit is much better than with traditional analysis.
Looking at our recent trades over the past 1 month, we were able to avoid bad markets and maximize profits when the market rebounds. While many traders and investors may have been in the red or remained on the sidelines since the last round, their portfolios were burned.
Know the Operator Transaction Habit to Maximize Your Profit
We all know prices are influenced by these big boys/ operators. Knowing their intentions not only helps us enter and exit better. It will also help us protect our profits by knowing when the market reverses. As usual, our trades last month were mostly short-term, even intraday, as we found that the operators in the market were attracting buyers at high prices. Usually, when most of the operators in the market are creating a lot of deals at high prices, it is when they are trying to attract more buyers/retail investors, creating "FOMO" (fear of missing out) to sell their shares.
From 1st to 22nd of April, 2022, we have a lot of trading opportunities, and there are many investors in the market who are still worried about market sentiment and choose to stay away from the stock market. After April 22nd, you can see that we entered fewer transactions than in the past 3 weeks. This is because the market is really bad and there are no trading signals that the operators are returning or even intentionally raising prices. It wasn't until week 2 of May that we started re-entering the market, taking more trades and capturing short-term market rally profits. If you attended our previous live stream, we mentioned that the market was still volatile at the time. It's best to move in and out quickly in this type of market because you don't want to wake up in a bear market the next morning. This is how we take trading opportunities when everyone is out of the market and protect our profits by knowing when the market will reverse through the operator's trading patterns.
We remember first telling our trading buddies that we would find lower entries and higher exits than traditional analysis. Everyone thought we were joking and that we couldn't find anything better than the existing analysis. Finally, they come back to us to learn more about how we did it. Most of our trades are able to exit before the share price falls and enter before resistance breaks.
We start with the Malaysia stock market as the nature of the market makes it easier for beginners to grasp the price movements of the operators. The Malaysia stock market is a good market for many beginners to start with. If you cannot make consistent profits from KLSE, please do not enter the US, Hong Kong or even the foreign exchange market until you have completed your elementary school in the Malaysia stock market.
Once you have mastered the operator's interpretation of trades and can trade without emotion, you can apply this analysis to other markets using the same principles. You will know how to study the operating habits of the big boys in another market and identify those price movements before they increase their prices.
If you still can't imagine how we track operators in the stock market just by trading patterns, check out Jesse Livermore, who did a "tape reading" of big boys’ trading in his day. The difference is that now you don't need to be a trader to know the trading data, all the data is on our trading platform.
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Malaysia stock market is a unique market, hence it requires a customized trading approach to tackle & swerve. Many existing traders in Malaysia apply a plug-and-play strategy from the overseas stock market, but it is not necessarily the best strategy to trade in KLSE. This is due to the difference in local and overseas stock market regulation and the size of market participants of institutional funds & retail investors.
“True traders react to the market.” is the backbone of our trading method. Our findings and strategies are developed through years of trading experience and observance of the operating style in Malaysia’s stock market.
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