Friday, February 19, 2010

Trade what you see, not what you think

As short term traders, it is important that we trade what the market gives us, rather than what we expect the markets to give us. The bottom line is that no matter what we think, the market is always right. This philosophy becomes especially important in these choppy markets, where frankly speaking, most of us have very little clue on what the market is going to do next. As I am sure you readers know, the last couple of weeks or so have been especially hard for trading. Most traders had been expecting markets to touch MA(200) and here we are, overbought for at least the last two days, and trying to regain MA(50). To give my own example, as you regular readers know from the daily reviews, I have been leaning bearish for the past couple of weeks, but as of now, I am up over 30% on the trades made during this time period. And here is the punchline - all by going long.

The point is as retail investors, who are we to fight the markets. What influence do we have on the markets? Zero. Nada. Zilch. Yet, many of us think that something is wrong when the markets are not doing what we expect them to do. Like I said before, the market is always right. You might be the greatest chart reader in the world but if you are a prisoner of your opinions and refuse to bow to the markets, either you will end up blowing up your trading account or sitting on the sidelines watching other lesser traders make money. How did that happen? The others perhaps traded what the markets gave them. They kept an open mind. Chart reading is highly subjective. For the large majority of the charts, a person who is long a stock can paint you a bullish picture and a person who is short the same stock can paint you a bearish picture, all by looking at the same chart with the same indicators. That is why it is so important that you have the stop loss point firmly decided before you enter a position - the time when you are going to be most objective while reading a chart. Once we enter a position, the emotions involved with holding a stock, namely fear and greed, begin to play their parts in us interpreting the charts.
Don't get me wrong. I am not bashing chart reading or technical analysis. No way! Just the opposite in fact. The same charts and chart reading skills that had me leaning bearish the last couple of weeks made me go long the individual stocks and make decent profits in the last two weeks. It is just that my overall opinion of the markets was just a basic guideline for me whereas, as a short term trader, what was more important and took precedence was the individual chart setups and how the market was behaving the instant I took position in a stock. Both view points helped me make money. The short term view point - individual chart setups - made me decide when to enter a stock and the fact that I should go long. The larger view point - overall market opinion - made me take my profits early and take smaller positions which prevented me from getting stopped out of trades during these choppy markets, a very distinct posibility.

That's pretty much what I want to say here - Don't trade with blinkers on. Don't become a victim of your own viewpoints. Trade what the markets give you. It is nice, actually important, to always keep the bigger picture in mind but don't let that get in the way of taking and making  the most of the opportunities that the markets are offering you.

Take care and good luck trading!


NQ Trader Jay said...

Thinking about the markets is good stuff. It is amazing how much thought we traders put in, long before and long after the setups that we see. While subjective the markets can be, I find using market internals to help me clear up some of that, some of the time. The rest of the time I have learned to stay out. Expensive lesson!

positiontrader said...

Hi Jay!

Agreed on the effort and time given on thinking! But considering the fact that over 90% of short-term traders lose money, the effort is very much necessary. I have been using Mcclellan oscillator a lot too recently trying to pick overbought/oversold conditions. But what I tried to point out was that if you are placing a day trade or a short term trade, what's most important is what the markets are offering you at that moment.I started trading actively one and a half years ago and have learnt during this time that overbought can very easily become more overbought and oversold more oversold :)

And hey, if you have developed the patience to stay away from trading when you think the odds are not in your favor, kudos to you!