22. Know cycles, recognize cycles, and handle cycles…
Almost all people naturally make a mistake when they enter trading markets: as soon as they enter they buy, buy, buy. My earlier explanation for why this is a natural mistake to make was that they were entering the market at the tail end of a bull market.
What is the deeper reason? The deeper reason is that when these people (including myself at the time) entered the market their minds didn’t have the concept of “cycles”. If traders have this concept in their mind, if they understand this concept, if they are good at using this concept, then they wouldn’t be very likely to see trading as a zero-sum game, would they?
After careful observation you will know that leeks only like to talk about trends, while the concept of cycles is fundamentally missing from their minds. At the most they will say:
- “Currently there is an upward trend…”
- “Currently there is a downward trend…”
- Or, “This is a major trend…”
Even thought this sort of description is sometimes useful, more often than not it is superficial and dangerous, because an upward trend needs a downward trend to constitute a full cycle. In fact, a true cycle is often only truly apparent after multiple cycles (at least two).
If we look deeply into true cycles, we will discover that rising and falling in the markets is merely a representation of a truth — actual economies don’t have straight lines, they only have fluctuation.
From within a long wave band, if you look forward or backward from any point, it looks as if you are on a straight line and not a curve, just as when we stand on the earth it’s hard to perceive that we are on a globe and and not a flat surface.
A rise and a fall constitute a cycle. If after two or more cycles we discover that the curve looks like a sin curve from math class, then the so-called “trend” was actually just a flat line. But the so-called “trend” that we often talk about and are looking for should be either up or down, because “flat” means “no change", and if there is no change then there is no trend.
This explains why what some people believe to be a so-called trend is by no means a trend in the eyes of others: the latter group places importance on true trends that become apparent after more than one cycle. It also explains why people who “buy the rise and sell the fall” will inevitably suffer: what they see isn’t the true trend, it’s nothing more than an illusion.
There is an important point here, and an interesting phenomenon:
All leeks believe in their bones that the target they are trading can’t actually keep rising…
So they “enter and exit quickly”; so they fundamentally can’t hold for the long term; so they “absolutely have no way to reduce trading frequency”… Even though when they get excited they’ll use phrases like “lifetime career” to describe what they’re doing, in their bones they just don’t believe that the target will rise over the long term.
The problem is, if you’re not sure that what you are trading is something that can rise over the long term, then what are you doing? It’s very strange!
Back to the point at hand, paying attention to cycles and the true trends that appear over multiple cycles will give you a brand new and more dependable world and view of the world.
… “If only I had taken a position at the bottom of the bear market, and then gotten out at the top of the bull market…” — There you go again, this idea has crossed your mind, which shows that you are still an immature child.
To tell the truth, in theory this is also skill that ambitious novices should learn in the end. But ambition can’t be this short-term, can it? Because what you are thinking about is “handling one bull/bear cycle”, and not “pass through multiple bull/bear cycles”… What did Old Mr. Buffett say? “The cycles that I like are eternal…” In this sentence, “cycles” doesn’t refer to the cycles that we are talking about, but why does he say he likes eternity? Because once you’ve reached a certain point, the money that you can make has already exceeded your ability to spend it. So, with the rest of it, what’s the difference in holding it for one year, or two years, or for eternity?
So how should you handle cycles? There are many theories, but in the end there is only one thing that I see as simple, dependable and easy to use without being too easy to mess up: carefully observe and understand the mood of the vast majority of traders. In a bull market, when FOMO reaches its peak and all sorts of investors are starting to be ALL IN, the upward trend slowly reaches its end; in a bear market, when most leeks have quieted down after cursing through their disappointment, the downward trends slowly reaches the bottom…
There are two famous charts that can help deepen your understanding. One is the “Kübler-Ross Change Curve”, and the other is the “Transition Curve”…
If you haven’t yet rushed into the trading markets, and you have unexpectedly read this small book, and you have already even read to the last chapter, the do you suppose that you will avoid the “mistake that almost everyone makes” mentioned in at the beginning of this chapter?
My guess is that you still have a 75% chance of making the mistake.
Why? Because you have a 50% chance of misjudging the cycle, and there’s a 50% chance your ability to control yourself doesn’t have a passing grade… So your chances of winning are approximately only 25%…
Controlling yourself is the hardest thing in the world. Later, when you reflect on your behavior, the saddest points will be when “you clearly knew what you should do but in fact you didn’t do it". It’s because the simpler the principles, the harder they are to follow. And when you realize that you weren’t able to control yourself, it will be hard to even imagine what it was that caused the situation. I also often feel like it’s without rhyme or reason — and the methods that I have finally found to resolve it are also quite unclear: increase time alone, increase time to blame myself, make myself feel more uncomfortable, hope to remember that pain, and hope that doing this will allow me to avoid the same stupid thing next time…