Traders have one of the most difficult jobs in the
world.  On top of having to figure out
market direction we also have to fight emotion, calculate risk, determine trade
size, pick entries and exits, and battle to stay true to our trading
plans.  And then, after we master all of
these facets of the game, we then invariably will have a few days of "I
was right about direction, how come I lost money?" 

This weekend I was perplexed as to why I had a few long side
losses last week despite the trend in the S&P being very clearly
bullish.  So I started to ask myself
why?  What did I do differently?  And the answer hit me like a freight
train.  Last week I was trying to jump
the market early for a BREAKOUT to much greater highs, where as before I was
sitting back and JBTFD; just buying the freaking dip.  Why is this important?  Simply, the market can trend in two very
different ways.  I call them the Grind
and the Explosion.  The difference is
enormous and directly relates to trading strategy.  Let's explore. 

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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.

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Let me tell you a quick story, I promise it leads to a point
about the market.  In January of 2010 I
went on a cruise with my parents the week of MLK Day.  The thought process was simple, I would only
miss four trading days instead of five, what could I possibly miss out on?  The market had been churning sideways to
slightly up for virtually a month and was showing no major signs of any
significant moves.  So it was the perfect
time for some Caribbean sun and a few drinks
with umbrellas stuck in pineapple.  I vividly
remember what happened next.  Wednesday I
was walking back to the ship, looked into a bar that had CNN on, and the ticker
showed the S&P -20.  Next day, the
same thing.  The day after that, same
thing.  I was FURIOUS.  The move I had been waiting over a month for
happened while I was stuck on a ship away from any way to trade.  So what's my point?  As always, let me present charts with
numbers.

MLK Week 2010

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Another year, another SEC college football
championship.  Here is the recap.  Alabama,
winners of two of the last three championships, lined up against an overmatched
team from Notre Dame.  Alabama's running backs were better, their
offensive line was better, their quarterback was better, their defense was
better, and most importantly their head coach had already won THREE
CHAMPIONSHIPS.  Yet there was a case for
all the "what ifs" that could help Notre Dame win. 

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