Tuesday, April 29, 2008

A Trader's Job

As it happened before, during some unusual market events and/or very jittery market action I get more visits and discussions from somewhat different sandbox - long term traders. I mean, normally they won't even give a second look to my measly 30 cents here, 60 cents there profts... OK, just kidding. Either current market events drive them, at least for the time being, to shorter time frame, or something they read in Techniques of Tape Reading stuck in memory and resonated with what they encounter now... interesting thing though is, they usually come to seek a change of a timeframe they operate in but what they find is a necessity to change their philosophy - no matter whether they look at 1 min chart or monthly one.

Anyway, there was this lengthy conversation over a course of several days which, with kind permission of my collocutor, I will cite here in as short form as possible. My remarks are in blue.

- So, here is a problem I run into. At the beginning of March I took massive short position based on negative read on the economy, on financial crisis etc, you know what headlines say for quite a while. Now, things don't really seem to be improving in general economy, so I know my read on it is right. The market action, however, is totally different story. For a week or so it seemed to be rewarding my entry - and it did nothing but go against it ever since. Now I am sitting on a massive loss, market just won't let go, and I just can't bring myself to take the loss - after all I AM right! banking crisis is far from being over, economy is in crapper, etc etc. Now, I did read your post and the follow-up on this topic and understand the concept of "too obvious" but still... shouldn't common sense prevail? How can I be punished that severely for being right? What am I doing wrong?

- You are talking about being right about economy state. What you are trying to profit from, however, is the market movement. You are coming from assumption that market must reflect the economy. While connection is there, it's not that straightforward. Ultimately, you are running into divergence between map and territory. Your read on the economy is a map. Market you are trying to play is a territory. If you see the differencies, will you insist on a map being right and a territory wrong?

- No, of course not but isn't such drastic divergence a sign of manipulation?

- It very well could be, and probably is. You can call it manipulation, you can call it market discounting the future, or come up with more explanations for this action. The important thing is though: whatever definition you chose, what does it lead you to?

- Explain this please.

- See, you can throw your arms up in desperation and say "this market is manipulated, it's impossible to make money in it". Or, you can view it as opportunity. Think of it this way: when you have this divergence between available information and price action, this is great trading opportunity. Market moving against the obvious is the one delivering maximum possible pain to as many participants as possible. Isn't it exactly the situation where Smart Money take advantage of the Crowd? That same situation that creates the very foundation of Tape Reading principles? Nothing particularly new about it either - I can list quite a few books describing just this.

- Come on... I just can't see this rally as real.

- What do you mean "real"? It happened, didn't it? I have a chart to prove it. You must be thinking of how sustainable it is when you say "real" - now, that's another matter and is a subject of continuous read of the market action. So far it's bullish in one timeframe, still bearish in another - and both of those are right until they aren't.

Now, when I ask what your definition leads you to, I want to make one more distinction. Don't ever forget what your job as a trader is. Your job is to make money, not to lose it. If it's a market direction that makes you money, give it priority over your fundamental read.

- OK, not to beat a dead horse, but just one more question on this. Obviously, as far as market direction is concerned, I've been wrong so far and the pain is serious. Was there anything to tell me it was coming?

- Have a look at this chart. First, double bottom came. Then it got confirmed by the break of the top between those bottoms. That was your first warning sign. Then inverted Head and Shoulders was formed. Then it got confirmed by retest of the right shoulder line and bounce off of it. Second alarm bell... Then major resistance at 1900 got broken. And notice, all this happens while all the headlines are still total doom and gloom! If that is not a writing on the wall...

- So, when does it end?

- I think you already know. It ends when majority of participants decides that the worst is really over and that they are missing on a bullish run. They jump on a rally bandwagon, start chasing it with no regard to the price... and get trapped by market reversal. Oh, and by the way - all this will happen with choire of cheerleading media justifying the bullish case.

- This is wicked...

- This is market...

- This isn't right.

- What is your job as a trader?

- Right... You know, I just realized one fascinating thing. I repeated these slogans so often, like "Don't argue with market", "Market is always right", "Don't fight the tape"... and I thought I internalized them, made them my mottos. Yet when it came to this situation, I found myself breaking all of them. I tried to outstubborn the market, outsmart it. If I got stopped out and waited for better entry, I would be totally fine. But no, I had to decide I was right and market was wrong... Got emotionally attached to my opinion, married to my position. Let my ego take over.

- All I can add is one more motto for you. My favorite. Trade what you see, not what you think. When you see markert action contradicting your thinking, chose territory over the map. Give a priority to a market action over your trading idea.

- This is hard.

- This is liberating... and, isn't the hardest thing to do usually exactly the right thing to do?

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