How to Be Wrong — and Still Book Gains

The end of 2010 is fast approaching. For many traders, this means time with family and friends — as opposed to time with the markets between 9:30 a.m. and 4:00 p.m.

But it’s also time for predictions. What will the markets bring us in 2011? Where are the hot sectors? Which stocks will emerge as market leaders?

These are all important questions — and there are no shortages of opinions out there. But I have to warn you: don’t get caught up in who is “right” and who is “wrong.” The fact remains that you can be “right” about almost anything in the financial market’s universe and still lose money. Today, I’m going to explain how you can be totally off with your market predictions, and still book gains on your trades.

While I usually focus on the performance of individual stocks, it’s impossible to completely discount the movements of the market as a whole. I am not immune to making short- and long-term predictions, but I don’t get hung up on whether or not my predictions become reality. I recommend you do the same. Leave your ego at the door, and remember that the market is always right. If you take this advice, you will be able to adjust your predictions without dealing with painful losses.

I tend to break up my short-term market predictions on a monthly basis. Here’s a snippet from an Oct. 31 alert I sent to my premium subscribers of Bulletin Board Elite:

“I have just a couple of quick items to discuss before I get into your usual Sunday updates. The first week of November is upon us, and that means a ton of data is going to hit the street. This could mean choppy trading much of the week. First up is personal income and personal spending, followed by auto sales and finally unemployment on Friday.

“Thus far, the market has been able to absorb any data that could be construed as negative and push higher. While this is a bullish sign, there is no way to predict whether this pattern will continue. Any numbers that come in well below expectations have the potential to sink the market, at least in the near term. Obviously, out of all of the data coming up, the unemployment rate will be the main one to keep our eye on.”

Looking back at November’s performance, you can see that this was only partially true. The market did not become choppy until later in the month. The first week of November — the one with which I was most concerned — turned out to be a stellar week for bullish traders.

A good example of the need to stay flexible with predictions is Express-1 Expedited Solutions (AMEX: XPO), a stock that I recommended to my premium subscribers back in March.

Had I been inflexible with my own predictions, I may have recommended selling Express-1 prior to November, expecting a sell off for stocks that never materialized. Adjusting my outlook and holding onto shares allowed us to ride the upswing… and we were able to close out this position the first week in November for a 63.13% gain! I may have been wrong about what the market was going to do in the short-term, but in the long-haul, we were able to book a large profit by adjusting our predictions.

The important thing is that I wasn’t emotionally attached to my predictions. When the market began to prove me wrong, I went along with it. That’s why I was able to book substantial gains in November. I didn’t let my own opinions spook me out of trading or letting go of any of my open positions prematurely.

When you are trading, you will not be right even close to 100% of the time. Of course, this applies to any market analysis as well. If you are willing to admit you are wrong early on, you should have no problem adapting to whatever the market throws your way.

Sincerely,
Greg Guenthner
Penny Sleuth

December 15, 2010

How to Be Wrong — and Still Book Gains was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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