Opinions, Opinions, Opinions

It's important to have an opinion when one is trading the market. The market is full of brokers giving their view on companies either telling the masses to buy, sell or hold. But are they really giving the right advices? It's part of their job to write such stuff even there is nothing in the market, it's their job requirements. It's up to you to read these and decide on whether to take any actions.

Here is an blog entry from Conrad Lim:

The Advantage of an Opinion

Over the last few weeks, I observed a disturbing trend amongst my traders and found that these “troubled” traders had a common problem (even amongst my seasoned and better Scalpers). This is a very familiar problem to which I had a simple solution. It was a psychological problem that was opening up a weakness in their style of trading or compromising their profitability and consistency - in other words, playing up their Fear and Greed.

We all know that the market has been going through a rough time and it has been difficult to anticipate any sort of medium term direction. The gyrations and volatility has made this market a Day Trader’s and Scalper’s dream. But therein lies the problem …

As the market wound down to the end of the year, volumes waned because of confidence problems plus the holiday season vacation which leaves the market with even weaker volumes than usual. Thus, what little sentiment that prevailed in the market, tended to give the market a false sense of any real direction. Knowing that we’re still in a Bear market, traders will tend to trade South. Also, the savvy traders will probably deny any presence of a Santa Clause rally in a Recession year and thus, also trade South. And as we can see, the market rallied for two weeks despite the odds.

Day Traders and Scalpers care little for direction. They will take their trade on the age old system of buying Supports and selling Resistance. The Day Trader will look at the general direction in the first 15, 30 and 60 minutes of trading (Scalpers will probably even make some money in that time too) and then decide if their trade should go up or down depending on prevailing indicators and market internals.

Nothing wrong with this approach … until you start wondering why you are not making more and why you aren’t losing less. As the low volumes gyrate the market unexpectedly on the slightest bit of insignificant news, the Scalper will run and the Day Trader will begin profit taking in stages just in case their winner turns into a loser. Then as the market recovers its “senses”, the trade goes on to continue its previous trend and the trader rues his decision of not staying in the trade, never mind that it was a profitable trade.

Sometimes, the trade reverses and never recovers its previous trend. The trader gets caught in the wrong direction because he thought that the gyration was irrational and inspired by knee jerks. It’s only when the losses start to hurt that the trader resigns himself to a bad trade and cuts losses much too late.

In either situation, it became clear to me that one common factor prevailed in these “plagued” traders … the lack of an OPINION. This opinion I am talking about is a pre-market analysis that forms a conclusion on which direction the market will take and what kind of gyrations to expect within the trading day. Such opinions are formed by using a myriad of information such as Market Monitoring, Trend Watching, Technical Analysis, Market Psychology, Sector Influences and the all-too-famous Newbie Factor (aka Market Noise).

All too often, people will email me with queries on the way my traders and I take on Scalps and Day Trades. They want to know what charts we use, what indicators we apply and what we look for. I usually never answer such queries because any answer I give them will only serve to kill them rather than help.

So much has to be studied and so much more has to be applied. It takes me more than 60 hours to impart such knowledge to my students and it takes my students many months of practice in order to execute a competent trade. So how am I to answer such queries in a single email?

Then comes the Mother of all lessons - Trading Psychology.

Honestly, how am I to teach anyone about trading psychology when in the first place, I don’t know what you have already learned and if what you’ve learned isn’t rubbish. (Trust me, there is a lot of rubbish being taught out there … do you know when you’ve learned rubbish? - Simple answer; it’s rubbish when it doesn’t work consistently or when you have the urge to email me with such queries.)

So, back to our troubled traders …

Their dependency on their technicals, market internals and indicators tends to give them some assurances and in some cases, a false sense of security … until something irrational happens and they start questioning their technique to no avail. When the problem persists, they will start questioning if there is something wrong with the market or with themselves … doubt and fear sets in. The problem compounds itself or in a best case, the profits are stagnant or diminishing … the greed starts to feed the fear. Maybe a change in technique or a tweek to the technical settings might help … but the problem persists. So an alternative plan kicks in and they change securities or change instruments … the problem worsens - at best, the problem doesn’t get better.

As the problem worsens, the frustration heightens and more money making opportunities are missed. Anger at seeing others profit while you lose or stagnate will blind your common sense and surely as the sun will rise, you have lost to Fear and Greed … you have become a victim of your own poor psychological management.

The one way to curb the greed/fear is to have an opinion of the market condition. Say you thought today would rally because its a holiday eve, you take a bullish trade and everything looks good for a rally after your entry … let it run because the worst that can happen is that it reverses big time and you get out in lesser profits. Is that a bad thing?

Say it didn’t rally for some silly reason, you’d be waiting to go bull at the first sign of reversal. It reverses and you take the trade only to find out it doesn’t have legs. You either cut a small loss or get out with small profits. Also not a bad thing.

This works both ways - bullish or bearish - the idea is to have an opinion and know what you intend to do before you do it. If it works out, great … if it doesn’t, get out. It’s that simple.

The Scalper’s bad habit of not caring whether we’re going up or down today … to see what happens in the market today and take that direction … such an attitude will result in the trader never being sure if he’s good to go and he will test the fear/greed factor every single time.

Start doing a simple Daily Pre-Market Analysis. Remember that it matters not if it’s right or wrong. I used to think like Jesse Livermoore …

This great quote from the all time greatest trader, got me thinking about how to handle my losses and then how to handle being wrong:

“A loss never bothers me after I take it.
I forget it overnight. But being wrong - not taking the loss -
that is what does damage to the pocketbook and to the soul.”
- Jesse L. Livermore

To minimize the “damage to the pocketbook and to the soul“, I use another great trader’s mantra:

“Its not about being right or wrong, rather,
its about how much money you make when you’re right
and how much you don’t lose when you’re wrong.”
- George Soros

Take on an opinion. See it change your results for the better and improve your consistency in losses.

Cheers and Happy Hunting!