We, as traders, are analytical and intelligent people. We love numbers, charts, patterns, and correlations. We are thinkers, always trying to read into
the future of the market, predicting where prices are going, and figuring out
how to profit from these moves. While
these are great attributes to have, they can often be detrimental to a trader's
success. Hold on, you ask, how is the
act of thinking bad for trading. Its
called a trending market; or as I like to call it The Idiot's Tape. Simply, in a trending market, thinking too
much can be hazardous to a trader's financial health.
My point is this, in choppy markets, a great deal of
analysis must be done to figure out turning points to maximize profits. This is a thinking man's market. In a trending market, not thinking is the way
to go. If the trend is up, trade long
until it doesn't work anymore. If the
trend is down, keep shorting until it doesn't work anymore. Here are some examples of how insanely long a
market can trend in the same direction.
How many "thinkers" rationalized a great reason
for shorting AutoZone, only to get absolutely clobbered by the mindless hoard
How many "intellects" kept buying UNG because the
spread between natural gas and oil was numerous standard deviations away from
historical norms? And how many idiots
just kept shorting, and got PAID?
Finally the S&P, the ultimate thinkers market. Look how many unrelenting trends have
occurred in just the past year and a half.
The people who got paid best in this time frame just kept hammering away
with the trend. The people who got
crushed tried to formulate wild conjectures as to why a massive crash was
"just around the corner."
As a personal aside, I used to love thinking about the
markets, and of course my mind always wandered to the contrarian side of
things. I always wanted to be the guy
who just nailed the top or bottom perfectly.
After losing money on plenty of "intelligent" trades I decided
I wanted to become the dumbest rich guy in the room. Just follow the damn tape. If the trend is up, buy. If the trend is down, short. Keep doing so until it doesn't work
anymore. But don't take it from me, take
it from Reminiscences of a Stock Operator aka the Bible of Trading, written in 1923. Clearly this isn't a new concept.
"The tape does not concern itself with the why and
wherefore. It doesn't go into
explanations. I didn't ask the tape why
when I was fourteen, and I don't ask it today at forty." -Jesse Livermore