AMATEUR HOUR

I did something I rarely do but needed to yesterday, I walked away. I have told readers that I have been trying to change my trading style and it has been a complete disaster. My last 30 days were the single worst of my career. I was long the Russell and at the time long bonds later to be stopped out of bonds. I decided to puke out of the Russell trade even though it was profitable, turn off my computer and walk away for awhile. I have been so completely out of sync trying to become something I am not, and I am completely done trying to do that. It feels like actors who do action adventures trying out a comedy role and I always wonder why they don't just stay with what they do well.

At times like this the trading business can be incredibly emotionally trying, and I am far from immune from that. The last 2 weeks in particular have been the most stressful of my 20 + year trading career. I even went to one of my close friends who is also a trader and asked him how he handles periods like this. I have to be honest and I guess I am lucky, I had never really had a meltdown like this. Yes I have had drawdowns but this one got close to 15% a huge amount for me. I decided to go back through the last 3 months of trades, print out every single one, and study what I had been doing both good and bad. Fortunately, or unfortunately, depending on how you look at it, I only had to go through about 30 trades before I discovered an incredibly consistent theme of one mistake specifically. There were others that I found, which is the theme behind today's post, but one thing in particular jumped out at me. Almost all of my bad trades were against the trend. That should hardly be a news bulletin, but I did not realize it just going along like I was. I was aware some of them were, but had no idea how many were against very strong trends. We have had a very strong trending year in the markets this year, so obviously a strategy like that is not going to fare to well. It is amazing I have net made what I have.

Let me show an example, so the point I want to make is clear. I was not just trading against trends to be a wise guy. I was doing so based on indicator patterns. I have warned of the tendency for any indicator to give false divergence signals against strong trends, so I guess I should have taken my own advice. Below is an example that will make my point.

You may have to blow up the chart or pull up your own to look more closely at this. I have indicated a trade on the short side I did in Crude in October, that actually made a small profit, but is typical of the mistake I have been making. Most trades with this error did not wind up as profits. My indicator was under the trend line so to me that said downtrend in momentum so look for shorts. However, we still need price to come in line, and it was clear at the time to me, not now, that when we made a lower short term high than the early October high, I could go short on a break of the next bars low. WHAT A MORON. There is certainly nothing wrong on the surface with that logic. However, what I would ask anyone who trades is, does that lower short term high just barely at a lower level than the prior one in a strong uptrend really indicate a trend change? Of course the answer is no. We did meander sideways here for another 2 weeks after I exited, but the trend never changed to down.

Here is the main point, make sure your trades are clearly in sync with a clear trend change if you are trading a market reversal pattern. Little wiggles do not qualify. Now there may be times when you have such huge divergences in your indicators that it dictates action. Those trades should be done and I will show one of those. However, just little wiggles like this are not enough. There are always exceptions, but this is the general theme I saw over and over again. I was interpreting little wiggles as supportive of fading a big trend and that is amateur hour on steroids on my part. Learn from my mistakes and do not do this. It is way too easy to fall in love with oscillator patterns. It is how they are applied to price that separates the men from the boys.

I hope some of you readers can learn from my blunders here. At times when you are trading well you feel you can do no wrong, and you get very sloppy. This was what I did. Do not ever take your eye off the ball no matter how much success you have. If you do that success can be fleeting. I will close with a chart of the type of oscillator divergence that dictates a trend change to be more aggressive with, that as you can see if much more than just a "wiggle." This market is one where I did trade properly and the good trades here were obvious, not anything like that disaster in Crude above.