LOCATION LOCATION LOCATION
Normally the above phrase is used in Real Estate, but I would argue that it applies to all walks of life. There is no question it applies to our little venue here of trading. If you look at the third signal on the above chart, which is a buy, you will notice what a great move that was. These are the trades that actually kill us.
Why in the world would I say that, it is the best trade on the chart?
The reason why it is terrible to catch a trade like that is that it ingrains a bad habit in us.
If you look at all the other Buy signals marked on the chart, they are all lousy. Trying to buy this market you would have had to buy it on that one signal and hold it for a long time, to catch every last little breath out of it to have come out ahead overall on buy signals here. In the real world, not many of us could have done that, I know I would not have. I was long during part of that run, and I did not get as much of it as I should have.
We are in an era where we have the largest up trends in history right now. Many of the rules of trading are being re-written. However, there is one rule that will not ever be revised. If you trade with the trend, that is where the majority of profits come from. That is especially true nowadays. Whatever time frame you choose to trade be it 5 minute charts or weekly, trading in the direction of the main trend is where you are going to find the most success. You often have seen me make counter trend trades, and overall I have done ok doing it, but it is not what most people should be doing. It is also not what I should be doing. I have had a very sub par couple of weeks, and yesterday I just about imploded. I decided to just go flat everything and walk away for a bit. I then went on to pound out and log every trade by my signals in several markets whether I took them or not. I had to find out what the hell I was getting myself into.
I found without exception that all my bad trades were against the trends in those markets. The good trades were with the trends. I often find myself trying to refine something like my indicator on the chart above, to just make them perfect. That is actually misguided logic. Once you have techniques for trading it is how you apply them that is the key to whether you have success or not. You can have the best setup logic in the world but if you apply it constantly opposite the price trends, you are not going to have success. You cannot make an indicator perfect enough to do well using it fighting trends, it is impossible. It is mental masturbation.
It is just obvious looking at the above chart of the Dollar Index that had you just traded the signals as they occurred in the direction of the trends, you would have done much better. There are rare times to trade reversals, but as I have stated in here before, you must have a monster divergence or something just so obvious that it jumps off the chart at you. If you do not have that, just play the first pullbacks. Catching a major high or low, and I have caught my share, it actually the worst thing you can ever do. Trust me on this one, you do not need to go verify that. Some things you can take other people's word for.
Konrad, your comments on the DX are similar to what I have experienced. I have been playing mostly the long side of this market. Look at the chart above, if we knew nothing at all about trading would that seem to make sense? I do agree with you that when the turn in that market does come, it will be a large move. However, it will also give us pullback entry opportunities. We do have at the moment what appears to be a pretty large divergence setting up there, so that may be enough for me to try and counter trend trade this one more time. However, if I do it it is going to be on smaller size, and I will look to get more aggressively long on the first pullback. Had you just had that logic in the above chart, you still would have caught about half that move off the lows when it did reverse after the third signal on the indicator at the bottom.
As to whether or not this stuff is coming to an end any time soon, let's look at the next chart, the Bernanke 500.
It is clear to me when you look at this chart, where you could have considered selling and where you should not have. I will admit, this market has been the toughest market to trade I have ever seen in my lifetime during the last 2 years. I have been wrong often on where we were headed next here. We do have a large scale megaphone pattern which is now in play since we made a new yearly high this morning. This looks very much like March of 2000 in the Bernanke 100 if you go look at it. What you will also notice when you look at that was how many shorting opportunities we got before we really got going on the down side. I would expect that the same will happen here. We will get an initial break, then when we bounce that will be our opportunity.
It is quite odd to see the world imploding financially like we see now, and have stocks be this strong I will grant you that. Of course we know that the real reason they are strong is government manipulation, so that explains some of this without question. We could get a top at any time, but I would suggest not fishing for it. Trust me again, my fishing expeditions in this in many other markets have cost me dearly during the last 6 months. Learn from me and do not do it.