20k’s knocking on our sensory index.
How are you feeling, this 20k?
I remember my trading screen, the first time 20k came. Lots of blue till it came, and when it came, the screen just turned into a sea of red.
Sell orders hit their auto-triggers, as if it were raining sell orders along with cats and dogs.
What is it about round numbers?
Why do they engulf us in their roundness?
I don’t think I am making a mistake in stating that the first person to recognize the significance of round numbers in the game was Jesse Livermore, the legendary trader. Jesse developed a round number strategy that he pulled off repeatedly, with enormous success. It is because of Jesse Livermore that a trader takes round numbers … seriously.
So, what is it about the roundness of 20k?
Plain and simple. The 0s engulf the 2. You don’t see the 2 anymore, and the 0s scare you. Or, they might excite you. Round numbers make the human being emotional.
Big question for me, to understand my own mindset – how am I reacting to 20k?
I would like to share my reaction with you, because it could help you understand your own reaction.
Also, writing about it makes me understand my own reaction better. Thoughts get assimilated.
Yeah, it’s not all social service here, there’s some selfish element involved too.
Besides, I have a bit of a guilty conscience about the amount of research the internet allows me to do, free of cost. I mean, I can get into the skin of any listed company with a few button-clicks. All this writing – is a give-back. You’ll get your calling soon enough. Nature will tell you where you need to give back. When that happens, don’t hold back – give freely. It’s a million dollar feeling!
Back to the topic.
I’ve seen 20k twice before, I think, perhaps thrice. Oh right, between late September and December ’10, it came, was broken, then it came back, to be again broken on the downside, all within a few months.
The aftermath of the first time I saw it (in November ’07) hammered me, though, and taught me my biggest market lessons. I’m glad all this happened in my early market years, because one doesn’t normally recover from huge hammerings at an advanced stage in one’s market career.
The second / third time I saw 20k, I was profiting from it to a small extent. A vague kind of strategy was developing in my mind, and I was trying all kinds of new trading ideas so as to formulate a general strategy for big round numbers.
This morning, I saw 20k for the fourth time, for a few minutes.
By now, I was on auto-pilot.
A human being will have emotions. A successful market player will know how to deal with these emotions.
I bifurcated my emotions into two streams.
One was the fear stream.
The other was the exuberance stream.
The former helped me decide my future investment strategy.
The latter helped me decide my future trading strategy.
In my opinion, a good investment strategy in times of market exuberance would be to not look for fresh investments anymore. This morning, I decided to stop looking for fresh investments, till further notice.
Sometimes, when you’re not looking for an investment, you might still chance upon a company that sparks your investment interest.
If that happened, I would still scrutinize such a company very, very thoroughly, before going ahead. After all, these were times of exuberance.
Yeah, fresh investments would be on the backburner till margins of safety were restored.
Now let’s speak about the exuberance stream.
Market looked ripe for trading. Fresh market activity would take the shape of trading.
Trading is far more active an activity, when compared to investing. We’ve spoken a lot about the difference between trading and investing, in previous posts. Investors enter the market when stocks are undervalued, because the general market is unable to see their intrinsic value. Traders take centre-stage when stocks are overvalued, because the general market is repeatedly attributing more and more value to stocks, much more than should be there. Traders ride the market up, and then short it to ride it down.
Yeah, till further notice, I would be spending my energies trading. After a while, I would re-evaluate market conditions.
That’s what I thought to myself this morning.