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Commentators on the financial markets often make statements like
"it's a bull market" and "the trend is up" as if these
were indisputable facts, but such statements are always opinions.
A statement of fact could reasonably be phrased along the lines of
"the market was in an upward trend between date X and date Y",
because if a sequence of rising lows and rising highs occurred between two
dates then the trend was, by definition, up during that period. However, it
is impossible to know the direction of a market's current price trend with
absolute certainty, let alone the direction of its future price trend. The
reason is that even if a market has just made a new high/low there will be
some chance that this will turn out to be the ultimate high/low.
For example, it's a fact that gold was in a bear market in US$ terms from
its peak in September of 2011 through to 24th July 2015 (when it hit a 4-year
low of $1072), but it is a matter of opinion as to whether gold is now in a
bear market. The bear market could obviously still be in progress, but there
is also a possibility that it ended on 24th July 2015. At the time of
writing, nobody knows for sure.
Some market participants and commentators will draw a line on a chart and
then make a statement such as "I will consider the trend to be up (or
down) unless the market proves otherwise by moving below (or above) my
line". Fine, but there's a big difference between claiming to know the
direction of the price trend and working under the assumption that the trend
is in a particular direction unless/until proven otherwise by some
predetermined event. The valley of shattered financial dreams is littered
with traders who were determined to stay 'long' or 'short' because they
thought they KNEW the direction of the price trend.
The impossibility of knowing whether a bull/bear market or an up/down
trend is going to continue, or even whether the market is currently in bull
or bear mode, makes risk management essential. Someone who knew the future
would never have to bother with risk management; they could, instead, risk
everything on a particular outcome because for them it wouldn't be a risk at
all. But ordinary mortals always face a degree of uncertainty when making
investment decisions and, as a result, always need to face the reality that
these decisions could prove to be wrong. Be wary, then, of advisors who claim
that there is only one possible direction for the future price of an
investment.
But while unwillingness to acknowledge the possibility of being wrong is a
defect in the approach of some investors, other investors suffer from the
opposite problem in that they have a hard time maintaining a bullish or
bearish view unless that view is continually being validated by the price
action. That is, they are incapable of remaining confident in any opinion
that doesn't happen to conform to the current opinion of the manic-depressive
mob. As a result they routinely get 'sucked in' following large price rises
and 'blown out' following large price declines, as opposed to taking
advantage of the mob's proclivity to be wrong.
Therefore, as investors the challenge we all face is to strike a balance
between staying the course in rough weather and preparing ourselves for the
possibility that there could be unseen rocks up ahead.
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