An excellent article that I had to post, its from the Trader Psyches newsletter, awesome stuff.
The first thing that comes to mind is "Oh, that move is too extreme and not supported, I think I will fade it." The majority of short-term traders do exactly that and put their stops just outside the day's range.
Simultaneously another group of traders feel severe regret over missing a good move and mistakenly think the only trade left is to take the other side. ("Oh it may still be going up but I can grab a few quick points on the retrace".) Now, where do you suppose THEIR stops are?
You got it... right outside the range.
The minority of traders wait for a pullback and instead of thinking "Oh now it is over" they get on-board in the direction of the trend - somewhere away from the extreme of the first or second push.
These members of the smarter money gang provide the "support" and in today's case also make a few of those people in the first group act out their fear of a short squeeze and benefit from the buying that starts to happen when the market fails to retrace any truly convincing amount.
What happens next? You got it - a move outside the range and the triggering of the stops of the first two groups. ... In other words, new highs on the day.
So this leaves the question - in any kind of trend, how do you learn to be in the pullback group (and circumvent the fear of missing out)?
Answers
#1) Learn to read the market as you would read an opposing team of approximately equal talent.
#2) Trace the feelings and their action-impulses MORE than you trace back on the chart. It is the sequence of feelings - hesitation, regret, frustration - more than anything that drives the counter-trend trades.
In short, this is using internal emotional/feeling data in a couple of productive ways. Spending time with it will actually have a greater payoff than obsessing over the charts.
This was clearly demonstrated today in the SPY as we had another day where short selling didn't follow through and was simply fuel to the fire. One quote sings true in my thoughts day in and day out in this environment and that is that in a bullish market investors climb a wall of fear.
The first thing that comes to mind is "Oh, that move is too extreme and not supported, I think I will fade it." The majority of short-term traders do exactly that and put their stops just outside the day's range.
Simultaneously another group of traders feel severe regret over missing a good move and mistakenly think the only trade left is to take the other side. ("Oh it may still be going up but I can grab a few quick points on the retrace".) Now, where do you suppose THEIR stops are?
You got it... right outside the range.
The minority of traders wait for a pullback and instead of thinking "Oh now it is over" they get on-board in the direction of the trend - somewhere away from the extreme of the first or second push.
These members of the smarter money gang provide the "support" and in today's case also make a few of those people in the first group act out their fear of a short squeeze and benefit from the buying that starts to happen when the market fails to retrace any truly convincing amount.
What happens next? You got it - a move outside the range and the triggering of the stops of the first two groups. ... In other words, new highs on the day.
So this leaves the question - in any kind of trend, how do you learn to be in the pullback group (and circumvent the fear of missing out)?
Answers
#1) Learn to read the market as you would read an opposing team of approximately equal talent.
#2) Trace the feelings and their action-impulses MORE than you trace back on the chart. It is the sequence of feelings - hesitation, regret, frustration - more than anything that drives the counter-trend trades.
In short, this is using internal emotional/feeling data in a couple of productive ways. Spending time with it will actually have a greater payoff than obsessing over the charts.
This was clearly demonstrated today in the SPY as we had another day where short selling didn't follow through and was simply fuel to the fire. One quote sings true in my thoughts day in and day out in this environment and that is that in a bullish market investors climb a wall of fear.
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