In one of the chapters Trader Vic explains how to assess risk of being involved in stock market.
When you are assessing the risk of being involved in the stock market, you have to ask yourself the following questions:
1. What is the long-term trend? Is it up, is it down, is it drawing lines, or is it changing?
2. How does the current long-term trend fit within the context of history in terms of extent and duration? Is it young, old, or middle-aged?
3. What is the intermediate trend, and where does it fit within the context of history?
4. What does Dow Theory say about the current market? Are there divergences? What does the volume tell you? Is breadth moving with the trend?
5. What do the moving averages say-buy, sell, or hold?
6. Do oscillators tell you that the market is overbought, oversold, or in the middle of a move?
7. What is the health of the economy?
a. Where is inflation and what is the Feds policy toward it? What are the levels of national, civil, corporated, and private debt? What is the rate of growth of credit availability as measured by free reserves? What is the rate of growth of the money supply? Where are interest rates? How are the markets receiving new issues of govemment securities?
b. How strong is the dollar relative to foreign currencies, and what is the likelihood that it could be debased? How strong are the yen and the deutsche mark and are those govemments likely to take action to protect them?
c. What is the prevailing attitude of the American consumer: produce and save, borrow and spend, or somewhere in between?
d. What economic sectors are strong? Which ones are weak? Are any stock groups driving the market, giving it the appearance of health when in fact the tide could easily tum at the slightest bad news?
e. What potential problems exist that could cause a sudden change of the economic climate?
8. What predominant fallacies exist that can be used to advantage, especially when the market changes?
Once you answer these questions, you then have the basis to decide when, where, and how much money to invest in the markets. And when you decide to make your move, youve got to do it in a very disciplined way