Friday, October 30, 2009

If You're Fighting a Trend, You're Defending Your View

One of the most common problems I see among intraday traders is that they end the day flat in their positioning, but not flat mentally. That is, they have no overnight risk, but they have a strong directional opinion on a swing or larger time frame.

Worst of all are intraday traders who become enmeshed in opinions about long-term market action, economic fundamentals, and political developments. Those views take the active trader away from the simple supply and demand that govern action on the day time frame.

Perhaps an example would be instructive. If I want to anticipate where my wife is likely to want to go out to eat, I don't reflect upon her distant past or her long-term aspirations. I'll look to where we've eaten most recently, what new places have opened, and what looks good for that night. If it's Saturday evening, I might not lean toward the most crowded areas of town, knowing she doesn't like to wait on lines. The longer-term information about her history or about her future plans simply does not drive the decision-making on such daily matters.

Quite a few intraday traders yesterday were run over by the strong uptrend day, which followed a strong downtrend day. Now if you had held a short position overnight, it's understandable that you would incur a drawdown. But if you went home flat overnight and spent yesterday fighting the market movement, it means that you didn't go home flat mentally. You weren't processing the mass of data that were telling you that this was a strong market day.

A while back, when I reviewed my trading results, I found that my performance was much better when I waited at least 10-15 minutes into the day to enter my first position. The reason for that was that, by then, most stocks had opened and I could see if the market was behaving in strong or weak ways. If I didn't wait for the early market action, I was more likely to be trading my opinion or prediction of what would happen--not what was actually transpiring on the day time frame.

All of this is not to say that longer-term trends and market data are unimportant. To the contrary, they are an important context to intraday market movement. But awareness of context cannot substitute for a reading of text: you cannot ignore *what* a person is saying and simply focus on their setting and how they're speaking. Worse still, you can't understand a person and respond sensitively if you're engrossed in predicting what he or she will say next.

If you're fighting a trend, you're defending your view. And that means you're ignoring the market. When the ego is out of the way, the view doesn't matter: you're free to sit back, read the market, and follow its signals. Conversations, with markets and people, go much better if you maintain an open mind and simply listen.

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