This week trading psychology article is inspired by couple of subs who commented in the Live Trade Room. Without naming them, one of them
One of the sub wrote in our Live Trade Room: I think buying EUR/USD at this level should be great bargain. Another sub wrote to me on email saying: “Is it time to buy AUD/USD given the yield spread between Aussie 10 year bond and the US Treasury 10 year bond? Why is it falling? I think it is a great bargain”. Still another was bullish Gold and still another was bullish wheat; another bullish cocoa.
That’s when I decided to put down my thoughts in the week Trading Behavior article. The perils of “fighting the tape” (trend) in markets should be understood by all traders including well accomplished ones.
Traders often times think like the next door consumer shopper think: “I need to buy at bargain-basement prices to get the very best deal.” (My wonderful wife many times comes home with a bag full of clothes, saying, “Honey, I just couldn’t pass up these bargains; I just had to buy them.”) Unfortunately, when trading futures markets (or stocks), thinking like a consumer shopper is unwise and unprofitable. I think one of the major mistakes most traders make is trying to “bargain hunt” and go long a market (or a stock) that he or she perceives as being “low-priced” or go short a market which looks pricey to the naked eye.
The trading landscape has been littered with the carcasses of traders trying to pick a top or a bottom in markets which are trending. These top-pickers and bottom hunters have so far been brutalized by the market–which is always right.
Don’t fight the tape. If the general market trend is one way, do not trade against it.
To determine if a specific trade is a tend trade or not: Make sure that the pair is in the same trend on its hourly, daily and weekly charts. For example a long EURUSD to be called a trend trade must stand on its merit and satisfy the trend conditions on hourly, daily and weekly. If not, then you may want to have further proof and strong evidence to take the trade.
The question though then is what about contrarian trading? To me contrarian trading should be an exception rather than a rule. Remember a contrarian is a contrarian. He/She is specifically taking an opposite position to the whole combined strength of Investment banks, giant commercial hedgers, dealers, prop funds and hedge funds. So if you are taking that position, make sure you get your timing spot on else you are meat for the sharks. Your few thousand dollars does not stand a chance if you are trying to be a contrarian.
That does not mean that Capital3x has not taken contrarian positions in the past but as I said its a specific exceptional and special situation trade. For example the Long EUR/JPY at 106.1 to a target of 107 was one such contrarian trade. The trade was taken on April 12 and was closed the next day. But when we trade contrarian, they are far too less than our trend trades. Often the contrarian trades come after we have made sizeable pips making trend trades.
You still want to fight the tape? Well email me with your trade and will try to answer them.