PostHeaderIcon The Blind Traders and the Market



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There is an old parable known as “the blind men and the elephant.”  In this story, there are four blind men who are asked to determine what an elephant looks like.  The first blind man feels the leg of the elephant and says, “The elephant is like a tree because it is large and round like a pillar.”  The second man feels the tail and says, “The elephant is like a rope because it is small and coarse.”  The third man feels the ear and says, “The elephant is like a fan because it is flat and thin.”  The fourth man feels the trunk and says, “The elephant is like a snake because it is long and curves.” 

A king comes to the four blind men and says, “all of you are correct.”  The king goes on to explain that each one had drastically different descriptions of the elephant because they are all feeling different parts.  So, they are all correct.  The elephant has all the features described by the four blind men.

This parable is a good analogy describing different types of profitable traders. Many of the arguments that erupt between traders on social media are due to not understanding the others  time frames or not understanding the other trader’s position sizing, stop loss level, or expected winning percentage. Also too many cult members of Elliot Wave, Trend Following, Market Profile, Day Traders, and option traders etc. think their way of trading price action is the only way when their way is only one of many paths to profitability. There are as many ways to trade price action to be profitable as there are profitable traders.

The elephant in the room is that profitable traders do a few things in common:

  1. They manage their losses to keep them small regardless of their winning percentage.

  2. They trade position sizes that bring their potential risk of ruin through a string of losses to virtually zero.

  3. They are an expert in their own profitable strategy.

  4. Their emotions are not used in trading decisions.

  5. Their ego does not pick position sizing, entries, or exits.

  6. They go with the flow of what is actually happening not what they want to happen.

  7. They trade a robust methodology.

  8. They do the work required to be successful.

  9. They are comfortable with what they are doing.

  10. Their trading fits their risk tolerance and personality.

Many profitable traders only see the aspects of the markets that make them profitable. Seeing the full dynamics of the markets and all the opportunities to make money is a step toward enlightenment.


PostHeaderIcon Momentum Trading Vs. Trend Following


Momentum trading is generally used to capture strong moves in short time frames usually for not more than a few hours or a few days. Generally momentum traders are very focused on only a few trades at a time at most and scan a large watch list for a few signals. Trend followers by contrast manage portfolios for entries and exits across diversified assets (usually future contracts) reacting to signals that allow them to capture the profits in long term trends and be on the right side of rare outlier events that lead to large profits through huge parabolic moves in one direction over a longer time period. 

Momentum is the  acceleration in a stock’s price that can be due to earnings, sentiment, news, greed, or fear. Momentum traders will  take a long or short position in the stock in the hope that its momentum will continue in either an upward or downward direction in the time frame they are trading. This strategy relies on short-term movements in a stock’s price rather than long term fundamental valuations. Momentum traders are trying to capture a strong move based on aggressive buyers or sellers bidding a price up or down by overwhelming one side of the bid/ask spread and setting off a strong move in one direction usually temporarily for hours or days.

“Trend following trading is reactive by nature. It does not forecast or predict markets or price levels. Prediction is impossible. Trend trading demands self-discipline to follow precise rules (no guessing or wild emotions). It involves a risk management system that uses current market price, the equity level in your account and current market volatility. Trend traders use an initial risk rule that determines position size at the time of entry. This means you know exactly how much to buy or sell based on how much money you have. Changes in price may lead to a gradual reduction or increase of your initial trade. On the other hand, adverse price movements may lead to an exit for your entire trade. Historically, A trend trader’s average profit per trade is significantly higher than the average loss per trade.”

“Trend trading is not a Holy Grail. It is not a passing fad or hyped-up secret black box either. Beyond mere rules, the human element is core. It takes discipline and emotional control to stick with trend trading through inevitable market ups and downs. Trend following seeks to capture the majority of a market trend, up or down, for profit. It aims for huge profits in all major asset classes — stocks, ETFs, LEAPS® options, bonds, currencies, futures and commodities.”

“Think of it this way: trend following is the only strategy that you could trade on a desert island. As long as you have market data each day, everything else is useless (i.e. CNBC, news, fundamentals, broker opinions, talking heads, etc.) for making the big money.” – Michael Covel

Above excerpt from www.trendfollowing.com

For more information on momentum trading.


PostHeaderIcon 10 Fast Facts About The Current Stock Market Environment $SPY $QQQ $IWM


  1. The long term uptrend stays in track as momentum slows and small pullbacks take  hold.

  2. Currently this market environment currently still favors buy and hold investors, trend followers of the long term uptrend, and swing traders from the long side during pullbacks. Buying strength or momentum on the indexes has just not worked for most of this year with all the fades and choppiness day by day.

  3. The short term support for the $SPY is the 21 day ema after that the 50 day sma is the next place buyers are probably waiting to buy the dip.

  4. The $QQQ bounced off the 10 day sma a loss of that level and the 21 day ema is the next level of support.

  5. The $IWM next level of support is the 200 day sma then the 30 RSI on the daily chart. Both very high probability entries.

  6. 100 Top Performing Stocks

  7. All Time Highs

  8. Stocks that bounced off their 50 day moving averages

  9. Stock Options Explain Doji Candles

  10. ChartYourTrade.com Stock Universe as of 07/26/2014

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PostHeaderIcon 5 Great Trading Articles for Weekend Reading


Weekend-Reading

 

 

 

 

 

 

 

 

Technical Analysis 101: Defining Support and Resistance

Random stock picking will beat S&P: Fund manager

The Single Best Predictor of Sustained Trading Success

The Best First Investment You Should Make

“What have you done for me lately?”


PostHeaderIcon Top Trading Tweets of the Week


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