To make money and survive in the markets I constantly ask myself , “Are you trading the market the way it is…or the way you think it SHOULD be?” I ask myself this question to guard against making a trade before it’s TIME to make the trade…and I ask myself this question to guard against hanging onto a losing trade.

Let’s remember this…markets go up and down, in different time frames, as Market Psychology changes. As a trader I try to determine whether the market is going up or down within my timeframe. If it’s going up and I think it SHOULD be going up then I’m a buyer. If it’s going down and I think it SHOULD be going up I WAIT…I wait until the market starts to go up or until I change my mind about where I think it SHOULD be going…to do otherwise usually means I’m going to lose money and be psychologically distressed.

For instance…over the past couple of years Gold Bulls have been wrong…they believed that gold SHOULD be going up but it was going down. They got angry, they KNEW they were right and the market was wrong and they kept losing money. Market Psychology has been negative on gold, commodities and commodity currencies…those things have been “out of favor” and stocks have been “in favor.”  Since the All Time High in September 2011 gold has fallen ~36% while the S+P 500 has risen ~50%.

Is the stock market “Dangerously Overvalued…and due for a Crash?” Well, I’m pre-disposed to think it’s overvalued, and a sharp correction could start at any time, but I’m not establishing short positions because I think it SHOULD be going down. I’m waiting. I’m missing out on the “easy profits” that I would be earning if I was long the stock market…but since my thinking and the market’s actions are out-of-sync then the best thing for me to do is wait.

I’m pre-disposed to think the stock market is overvalued and at risk of a sharp correction because the current Market Psychology “feels” a lot like it did prior to some of the previous corrections or crashes I’ve lived through over the past 40 years. But just because it “feels” that way doesn’t mean that it’s TIME to get short…the stock market is going up, not down so I’ll have to wait until my “feelings” and the market action are in sync!

This advice is for traders…and may not be appropriate for others. For instance…as a trader I would never buy something just because it’s down 50% from where it used to be…but for someone looking to buy a house to live in (not to flip for a quick profit) a decline of 50% may mean that they can afford to be a buyer…that the price decline created some “value” for them.

But for traders or flippers the advice is pretty clear…buy a market that’s going up, not down…if the market’s action is out-of-sync with your analysis then wait…and if you make a trade and it turns out to be a loser then get rid of it…don’t look for a reason to hang onto a losing trade.

Trading:

EURYEN closed at a 5 year high this week. The weak Yen has been a Key support for equity markets around the world since November 2012 when Market Psychology determined that Abe was going to win the election and begin implementing policies to end two decades of deflation and deflationary expectations in Japan.  Since November 2012 EURYEN is up ~40%, the Nikkei is up ~90% and the S+P 500 is up ~33%. The weak Yen and the strong stock market are two sides of the same coin. There is a massive speculative short position in the Yen…just as there is a massive speculative long position in the stock market. If there is a change in Market Psychology the Yen could rally while the stock market falls.

EURUSD has been much stronger than I expected over the past month. I bought USD in late October and sold it for a good profit in early November when the rally struggled around 8150. I bought the USD again in late November but sold it a few days later when it refused to rally. I think the EURUSD should be headed lower but it’s not…I’ll wait.