The markets are sliding and the traders are running for cover! When we see this kind of market action this conjures up all kind of nasty images in the minds of traders. The most common images for anyone who has been around the trading world is probably that of a bear attacking its prey which in the world of trading is mainly the bulls getting mauled? The question that comes to mind is why do we associate the market action with these two animals? Why the Bull and why the Bear? This week we will delve into this question and then we will talk about one of the most important things to remember when the markets turn.

For those who are uninitiated with the story of the Bulls and the Bears, I am going to relay the story as it was told to me. I claim no accuracy to this story but it is a good story regardless. From what I was told when I was a brand new trader and posed the question to my mentor…why Bulls and Bears? He told me that the stock market was designed to kind as much pain to as many participants as possible. I believe he was saying that with a little bit of tongue and cheek but that there was also some truth hidden in there and so I pressed him further as to what he meant. He then told me that the Bulls and Bears were chosen because of the way in which these two specific animals attack their prey. The prey as he put it was the market participants that he was talking about feeling the pain. He went on to explain that if one was to watch the running of the bulls or a bullfight one may notice that when a bull attacks it tends to drop its horns and then drives upwards on its prey. You can see this in action on youtube almost anywhere but I would caution you it’s not pretty. This then brings us to the Bears. Bears are typically very tall animals and tend to stand on their hind legs and attack by swiping in a downwards fashion. You can also see this on youtube but again I would caution against that as it can be very horrific. I think one can now understand that the reason we call rising markets bullish is because of the nature of that particular animal and the same goes for a bearish market only in an opposite direction. So, now that we know the story let’s talk about what we need to remember when the markets take a turn.

I get a question from almost every new trader that I encounter and that is what do I do when the market turns and how do I know if it will be just a slight pullback or whether it will be a full-blown correction? That is a very logical question as I had the same question for my mentor when I was new. What he told me was kind of shocking. He said nobody really knows what the market is going to do? Of course, I followed up with how do we know how to trade if we have no idea where the market is going? He said we do not need to know where the market is going but we need to know where it’s been and what happened the last time it was there. This of course sounded very strange and was somewhat confusing but because he was a great mentor he went on to explain to me exactly what he meant.

My mentor was trying to get me out of the predicting business and getting more into the observing business. He proceeded to explain to me that trying to predict where the markets or a particular equity will go is an exercise in futility and that observing the path that the markets took to get to where it was usually lends to a more actionable way to look at the markets. What he was referring to specifically was a markets propensity to go back the way it came when it goes in a particular direction. He referred to this as levels of the markets. We know them better as levels of support and resistance. These levels are areas, or zones in which the markets tends to either stall or even reverse at these levels. This is all based on the psychology of the trading participants as everyone tends to watch the same things and even the computers that are programmed to trade are programmed from the mindset of a trader which in turn looks for the same things.

So if you find yourself wondering what the market might do then take a look at where the market has been and recognize the levels that have caused changes in the past and you may find that things will again happen in those areas you can use this knowledge to plan your attack whether it be from a Bullish or Bearish perspective.

Happy Trading,

Coach “Old Money” Holmes