Monday, May 31, 2010

Trade what you see, not what you think

Well dear readers, I hope you are enjoying the long weekend. This was just supposed to be another post with some charts, support and resistance levels etc etc. But then I thought, would I really be sharing anything with you readers that you don't already know. You know that the market got rejected right at MA(200). You know the support lies at around the 1040 levels. Do I know where the market is headed next dear readers? To be honest, I don't have a clue. And don't trust anybody who says that they do.

What happened Friday? The market was consolidating rather well for most of the day, after the big move up on Thursday, until the last few minutes, when we made a sharp move lower. We had even recovered well from the news of Spain downgrade until then. Now, was the movement in the last few minutes due to fundamental reasons or just traders not wanting to be holding long positions heading into the long weekend? And now we have the Asian and European markets holding up rather well overnight. Does that mean most of the Euro zone debt fears is already priced in the markets? Do you really want to go short when every blog you read or everyone you follow on twitter is predicting the worst? If everybody expects a sharp correction, does  it really happen? Too many mixed signals out there dear readers! How the hell is one supposed to trade markets like these?! Well, like I said earlier, I don't claim to know all the answers but this much I can tell you dear readers......Trade what you see, not what you think.

Exactly. And this is what I feel holds the key to making money in markets like these. Trade what you see, not what you think. Sounds simple, doesn't it dear readers? Let me be the first one to tell you that it is anything but. As human beings, we are all victims of our own beliefs, opinions, prejudices etc in life. And it should come as no surprise that this same psychology extends to our trading. So often we let our overall bias or opinion of the markets influence the way we interpret the markets. Now, I am not saying that it's bad to have an opinion or general view of the markets. Anything but. But at the same time, it is very necessary to realize that the markets do not care a damn for our opinions. 

And that's the trouble with technical analysis, it being so subjective. The same chart can be read as bearish by a person with a bearish bias towards the overall markets and bullish by another person who has a bullish bias towards the overall market. That's why its so important that as short term traders we keep our overall opinion and biases at the back of our minds (am not saying forget them!) and not let them be at the center of our decision making. I know of so many traders, some much better than me I will admit, who pretty much missed out on the entire rally since March, because they weren't convinced that the economy was actually recovering. Now, it is quite possible that these traders will eventually be proved right on their views on economy. But they lost out on an opportunity to make lots of money, and some actually even lost money, because they were trading what they were thinking and not what the charts were telling them.

Let me end by giving an example of my own trading on Friday. Early in the trading day, I took partial profits in ORLY, loss in DLTR, profits in MTG, day traded PMI for a decent gain - all because I wanted to be in mostly cash heading into the weekend. I had a slight bearish bias towards the markets in general which made me uncomfortable being overly long during the weekend. But then I saw opportunities in RDN and NR close to the end of the day. I debated with myself whether I should go for it. I still held the bearish bias but at the same time, I felt I owed it to myself and my trading system to try and take advantage of any opportunity that arose. I ended up reaching a compromise and taking positions half the size of what I usually take, and am quite comfortable holding them into the weekend. Now, I did not totally neglect my overall view of the markets (bearish) but at the same time did not let it come in between me taking short term long positions when I saw the opportunity. That my dear readers, is trading what you see and not what you think.

Whew! That turned out to be a lot longer post than what I had imagined when I started it! I will be back tonight with some charts for your watchlist.

Take care and have fun!

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