Wednesday, January 20, 2010

Fade What You See

It only takes a few minutes of conversation to figure out who knows something about markets and who doesn't.

One unerring confession of cluelessness goes by the maxim, "Trade what you see."

If trading what you saw made money, you'd be a raving success buying short-term strength and selling short-term weakness. But that has consistently lost traders money over the years.

If trading what you saw made money, the field of behavioral finance would not exist. The entire thrust of years of research is that our perception is filled with cognitive biases that affect decision making.

Do traders *really* think that all the time, effort, and money that the world's leading traders and portfolio managers put into their research and generation of ideas is worthless? That all they need to do instead is put positions on based upon what they see in a trendline, a chart pattern, or an oscillator reading?

No, it's precisely because unaided perception is flawed that we need to go beyond what we see and identify the themes and intermarket patterns that lie behind price action.

Because some of the best opportunities in trading are when the herd is seeing one thing, but the markets are telling us something quite different. The great traders can trade what they see when everything lines up, but they also know how to fade what they see, when what's obvious becomes obviously wrong.

11 comments:

Steve said...

Fade what you see, and don't fight the trend!

LOL- makes perfect sense.

Milk Trader said...

Trade What You See is a typical shibboleth in trading that drives me nuts. It's part of a long list of them that come from those you've heard something about trading, and take great delight in parroting what they've heard. They are meaningless at best, and a dangerous crutch at worst.

madi said...

Brett,
This post made me laugh. Yes, there's been many times when I read the "chat room know-it-all" tell some guy with a well thought out opinion to "just trade what you see."

I know for myself, when my eyes start to bulge out of my head, that it is most likely time to take the opposite side of the trade. In the old days, I would have chased to my doom.

In some ways, today's ES has played out as a mirror of yesterday. There were basically two short entries...the open and 1137.25 ( which wasn't much of a bounce - more like a ripple). Now, 12:45pm, we've been trading around 1128 for the past hour, finding a value point. I'm looking for another good entry to short. Yes, this guy is trading with today's trend, unless there's evidence to the contrary.

zircon-212 said...

I disagree on your view that 'trade what you see' is phrase for the clueless. I believe the phrase reminds one to not let personal bias and views of what the market should do as opposed to what it is doing. The 'Fighting Market Moves' post from yesterday actually reinforces the trade what you see. If one fought the trend/strength all day it was most likely a losing day. Sure if you held it overnight the defense of your view is there, but on a short term basis trading what you see would have saved a lot of money for those trying to fade the rally or justify why the market should not be going in the direction it was going. I think the phrase is applicable to all time frames as well and works for us clueless ones out here.

procol said...

The problem is , once you've crossed all these pieces of pseudo wisdom off the list, you're left with precious little 'cept insider information and hft frontrunning.

heh.

Zhenning said...

Brett, how do you reconcile the theme of this post and yesterday's post "How to Become a More Consistent Trader?" I find myself sometimes struggling to decide on following or fading the trend. Thanks!

nemo said...

Well, what an expert sees and what a neophyte sees are very different-in any discipline.

So, once we learn what to look for and how to properly react, we do act on what we see-in any discipline.

nemo said...

Oh...as a follow up...as expertise develops we truly see what is before us, as opposed to what we think we see...

Think of a small child who paints a tree on a piece of paper and makes the leaves a pure, primary green. He's been told leaves are green, so that's what he makes them.

It's not until later, perhaps when he begins to take art more seriously, that he truly begins to look at the leaves and sees the variance in color and the structure of the leaves.

kseries said...

Hey Brett
Interesting post
"If trading what you saw made money, you'd be a raving success buying short-term strength and selling short-term weakness. But that has consistently lost traders money over the years."

Trading what you see doesn't mean you're always buying ST strength or selling ST weakness. Sometimes it means the exact opposite. It depends on what type of setup and market you're trading.

I agree with zircon that the phrase is to remind traders that their opinion/views means very little in the short, medium, and sometimes very long term. That they should be focused on what the market is telling them through it's price action.

A portfolio manager's goals are far different from most traders who visit this blog. I wonder what % of funds outperformed the markets in the last 2-3-5 years even with all their precious research.
The longer your timeframe, the more reasons/conviction you'll need to play out the position.

As for us short term and swing traders, sometimes "the chart looks good" is more than enough reason to get in there!

cable trader said...

Trade what you see is misleading the way you
describe it. I would not call the maxim
cluelessness, I'd say different trading
style, right or wrong. I could be buying
strength what I see on dailychart by buying
weakness on 15 minute chart.

I cannot trade like a portfolio manager.
But Portfolio Manager is exactly why I can
trade what I see.
Sure I have ideas and they can create some
powerful biases. But the market does not
give a shit what I think. Unless my idea is
playing out in the market(you see it in PA),
it is not happening.
Moreover, ideas other than the ones based on
PA are difficult to implement. I don't know
how you connect some macro idea to an intraday
price flow (unless you invest). This could
give you a false believe, you have profitable
strategy.

Yes there might be a time to fade but not
sure that should be your primary strategy.
Fading might be a very bad idea for lot of
people reading your blog. Fading, IMHO, is a
very advanced setup. Please, do not fade trend.

For those who belittle "trade what you see"
only shows your inexperience. You do not knock
anybody's style, ever. Are you making money
with yours?

G.

kseries said...

Amen Cable Trader
Making money in the market is tough and anyone who does it deserves kudos, no matter how they go about it. To each his own.
In fact the one conclusion i have been able to draw from those who belittle other trading styles is that they've probably have never consistently made money trading. ,