Yesterday the KLCI touched my identified aread of resistance before selling off again (I drew the line in the sand at 1200 and it hit 1201.45). So for that, I’m pleased, but it really doesn’t matter because the important thing about being a good trader is not about being able to predict prices. It’s actually about being able to figure out what you are going to do if the price gets there. This is a huge huge lesson to learn and something the majority of traders don’t realise. Traders are not economists. They are not paid to predict share prices. Instead, they are paid to make investment decisions based on market behaviour. To a large extent, views and opinions are secondary. If you compare trading to a sport like Formula 1, you can say that Michael Schumacher is not really paid to predict how many pit stops his competitors will make, or what tactics they will use, or what time they will take to finish the race. He is actually paid to drive and react to what is going on around him and win the race. A large degree of flexibility is required.
So here’s an exercise which I regularly practice (takes about 30 - 40 minutes) to keep my mind open, my feet on the ground and focused on share prices:

A. Print out a chart of the KLCI on paper which goes 2 or 3 months into the future.

B. Take a pencil and simply draw a line from the last price today going up 200 points into the next 2 months, then draw a line which stays where it is, and a third one which goes down 200 points in the next 2 months.

C. Now for each line, imagine that is where the stock market will be in the next 2 or 3 months. Then for each line, write out your answers to the following questions:
1. what cash-equity ratio your portfolio will have,

2. what sectors/type of stocks you will investing in, and

3. whether you want to be accumulating or lightening your positions.

Now that is not as easy as it seems, because there are times when you will want to be adding to positions whilst the price is going up (e.g. if at current levels a bottom has formed on the market or a breakout has occurred on high volume), but on other occasions you will want to be lightening your positions instead (e.g if markets have been rising for a while and is over-extended.)

Once you have your answers, frame them up and paste them on your wall infront of the computer screen. That is your trading plan. Of course the more possibilities you plan for and the more time you spend doing this, the more refined your plan will be. This is my version of a very basic test which Wall street derivative houses actually run computers to do. These simulations plot out hundreds of possible price patterns and analysts spend all day planning how to manage their portfolio for each emerging price pattern. This reduces emotions from what is going on in the market, and back a few years I used to do this almost daily for my day trades on the fx markets so when the sh*t hits the fan and I feel myself panicking I just look at that picture I drew and remind myself what I said I would do if the market went there to prevent my emotions taking over.