Investors looking to enter a position could find a simple way to verify whether it is a good idea to enter or not. What we have found over the years is that the best entries in new positions occur when it feels really uncertain. The opposite is true as well: when market conditions feel certain you know almost as a fact that you don’t have a good entry, and it will come at the expense of profits. As explained in great detail in 7 Secrets of Successful Investing you create success by being (thinking + acting) in a counterintuitive way.
When exactly to enter a new position?
It is the one and only thing that should keep investors awake.
The investing dilemma
It is the entry price that determines success of an individual position or investment. A great entry price will deliver more profits if the trade works out well, but it will also give a great stop loss.
In the end it’s all about timing. Successful investing is about timing the market. As explained in our 100 Investing Tips For Long Term Investors:
‘Timing is not the most important thing, it is the only thing.’ … ‘Timing is the only thing‘ means that it is more important than reading news, analyzing fundamentals, following gurus, and so on. Excellent charting skills are a prerequisite to apply this principle!
This brings up the classic investing dilemma: how to know when exactly to enter a new position knowing that there are only unknowns as of the moment you open that new position.
Investing equals uncertainty
The issue with investing in financial markets is that you are mostly on yourself. There is nobody to coach you, at least not for 99% of market participants. Even investment advisors are not the best imaginable help (in terms of effectiveness and profits).
This comes on top of the unknown nature of the market: you cannot know for sure what the market will do with your position after you have opened it.
If not you are investing (or trading) with a club or in a team there is another issue: bias but also divergence of methodologies.
That’s a lot of unknowns, right.
The issue: our human brain
You are all by yourself, and the biggest problem with this is the human brain. Most market participants try to solve this ‘all by yourself’ issue by searching for information. That’s because how the human brain functions: the more info we have the more we are re-assured about the ‘right’ decision.
Nothing is further from the truth though.
More information when investing in financial markets mostly comes with less accuracy.
In other words, the intuitive reaction of a human is to deal with uncertainty by collecting more information. But the reality is that this is not the right answer. It only creates bias, and also the illusion to the internal system of the investor that he/she is doing the right thing.
The answer to the investing dilemma: be counter-intuitive
Here is one way to deal with this issue: use your emotions to your benefit.
Most of the time emotions do not help. They are doing you a disservice. Think of your excitement when a position has a great day. A few days later it goes down significantly, you feel bad. It does not help, your emotions distract from what is important (which is validation and invalidation criteria).
The issue is that investors use their human instincts also when investing. As said before that’s not a recipe for success.
Investors need to do the exact opposite: use their emotions in a different way.
One way to use emotions more as a ‘signal’ to solve the classic investing dilemma is to feel the level of uncertainty. If it feels uncertain there is a higher probability that the entry might deliver great results.
Whenever it feels really good (certain) there is a very high probability your entry will not be right.
Now let’s be clear: do not mix up an uncertain feeling with reckless behavior. What we are NOT saying is that you buy during a strong downtrend, bearish momentum, a market crash. There is a different ‘investing tip’ for this which says ‘you buy an uptrend’.
What we are saying in this article is that once you have determined an uptrend (new uptrend or uptrend continuation) you can use your emotions as a signal to understand if you are hitting a great entry.
