TO BE OR NOT TO BE......... A CHAMELEON?
Trading is such a challenging profession and it tempts us to do all sorts of things that are not in our best interest. There is no other endeavor I know of short of climbing Mt Everest or some task like that, which gets is more exposed to who we really are internally. Your flaws will be exposed in trading no matter how hard you try to avoid it.
There are so many different ways to go about doing this trading stuff that it is hard to settle on one approach. All have merits, all have flaws. It is tempting to try and combine approaches to get a kitchen sink type of strategy that works in all types of environments. To this I say........NOT!
You have to go to battle knowing what the limitations of your techniques are. Some people are just naturally contrarians, some are natural followers. For these two types of people, the former should be reversal traders and the latter trend followers. Both of those approaches have flaws. Reversal traders can get absolutely wiped out during periods like we have now where the trends extend seemingly endlessly in one direction. On the other hand trend traders can get wiped out during consolidation periods, or trend reversals. One of the very best ways to trade stocks is to buy weakness in strong up trends just at the market once you get to a certain level of oversold using no stops. You then buy more as the trade goes against you legging into your full position. Once the underlying trend reasserts itself like this past week, you rake it in.
I personally cannot trade without stops so even though I know that is a dynamite way to trade and can be statistically proven to be, I also know that when the trend does reverse, you will get absolutely clobbered. I don't like trading a style that I know at some point many months of great trades profits will certainly get wiped out in one fell swoop. As a result, I choose not to trade that way even though I know even after the beat down, you still wind up ahead. I went into just this one example to make it clear that what ever style you choose just understand the weaknesses of it and plan accordingly. If you are a reversal trader you just have to "know" that during periods of time like this you are going to lose money, so you need to be strict in your discipline so that you will be there when the inevitable "big one" comes along. That style is very low win percentage, but pays off big eventually.
The temptation then of course comes in to try and combine reversal trading and trend following. I am not going to say this is impossible, but it is very very difficult to do. You have to completely different mindsets that require you to completely detach yourself from any predispositions, and just read what is happening in the markets at any given moment and make a decision. This can get you chasing your tail so many times that you will bite if off in frustration if you ever catch up to it. Let's look at the chart above and discuss the COT stuff for a minute.
I have marked on the chart where the COT data and indicators tied to it told you to take action. You can see there were some fantastic calls, and some lousy ones. Guess what, that is reality. Nobody buys every low and sells every high in spite of all the bogus advertising people do. When I first learned of the COT data many moons ago, I thought it was the greatest thing since sliced bread. Now at times I would far prefer a loaf of sliced bread to it, but at other times I love it. During very strong trending periods the COT data often shows heavy counter trend positions by the commercials due to the basic nature of what they do, hedging. If you just look for them to be net short and sell you are not going to do so well. During big trends you will be carried out on a stretcher like the Duke brothers were. However, you can also see where the indications of their positions are quite timely.
This is an example of knowing the limitations of your tools and what they are and are not good for. You cannot take the COT data and be a Chameleon with it. It is not all things to all people. I am sure most people know that "guy" the kiss ass who blows with the wind at the office and tries to make everyone happy. He sells you out in a heartbeat to get on the right side of the discussions. You cannot be that "guy" in trading. You have to stick to your guns, know your limitations, and deal with what they bring knowing your strengths will ultimately give you good results. The COT data above is an example and a hard learned one for me, of me trying to make this do something it does not, pick the end of trends. I accept that at times this is going to make a trend look like it has to end now when in reality it might go on for several more months. Can you say GOLD last year. I got fooled into thinking that market had to correct based on the COT data. Although I did trade that market profitably last year, I missed some longs I should not have due to the COT stuff influencing my thinking. I accept that as a limitation to how I trade even though I don't like it. There are alot of armchair quarterbacks who know jack about trading, that were right about this market and I was wrong. It is what it is. I can blame the COT but it was really me not fully accepting the limitations of one of my tools that led me astray there.
DON'T BE THAT GUY, DON'T BE THE CHAMELEON
Here are a couple of trades I am looking at for today. I do not watch live quotes intraday so I do not know what is happening with these as I type this entry. I know my limitations and know that watching every tick tempts me too much to not honor stops so I just do not do it.
This is GOLD and you can see where I have an order in to sell short. This has been far weaker than Silver. Silver also had a pattern to sell but as I harp on constantly sell the weak one not the strong one. The next chart is CRUDE OIL. This market has an incredibly bearish COT situation, the most in history, so I have been looking for short entries. Here we may well have one of those instances where the COT is leading me astray. Since we are at such a historic amount of longs with the Small Specs I just felt it was worth a shot.
I will tune in this afternoon to see what happened on these potential trades. We also have other things we are in but as I have said, I do not disclose every thing I do in this blog for obvious reasons.
Good trading to everyone