I turned the computer off, walked away and realized that I had no idea what I was talking about. I think I was conflating two thoughts and ended up choosing the incorrect part of both. Boy, do I look like a doofus. :smack:
You are correct. What I should have said was that you are correct, on any given day, you have a 50% chance of being right about who will win the game. Over a long enough sampling period, your success rate at choosing the winner will be 50%.
These are not betting odds, especially for the stock market. I think it is an incorrect assumption to assume that on any given day, the price of the security will have a 50% of being higher or lower. First of all, this discounts the possibility that the price will be equal to the previous day’s price (although that is pretty rare). Second, you are not taking into account the magnitude of the changes in price. For some reason, every argument I’ve seen along these lines assumes that the advance/decline will be equal to each other. Assuming this is true, if you spend enough time in the market, you will eventually lose due to commissions paid that are not being recouped in the gains.
What Kaufman is essentially saying is that there is a trend that will take hold in the given stock and, while in the trend, each day is likely to follow in the direction of the previous day. There will be corrections, of course and the trend will eventually end, but in the mean time, one stands to make more money by following the trend.* If you have evidence that the price of tomorrow’s market will be higher, why short?
What you are not considering is the idea that when the price of a stock rises, someone will take notice and say, “aha! According to my calculations, this will continue. I should buy more shares.” This extra participant will create extra demand. Someone else will see this and say, “me too” etc., etc. With all this buying going on, what makes one think that the price will drop suddenly? Certianly these people will decide to take profits at some point, but remember that for every seller there is a buyer and depending on when the seller sells, there’s a good chance that the price will increase.
Also, the old saying, “cut your losses and let your profits run” applies here as well. If you take a trade and it immediately goes against you, the common sense thing to do is to get out. If you continue to make money day in and day out, why would you exit the position? Your trading program could have built-in profit targets, but you could also establish rules to determine at what point the market has moved against you and close out your position then.
- Of course, determining when a trend has started and when it ends are another matter entirely).