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:
They manage their losses to keep them small regardless of their winning percentage.
They trade position sizes that bring their potential risk of ruin through a string of losses to virtually zero.
They are an expert in their own profitable strategy.
Their emotions are not used in trading decisions.
Their ego does not pick position sizing, entries, or exits.
They go with the flow of what is actually happening not what they want to happen.
They trade a robust methodology.
They do the work required to be successful.
They are comfortable with what they are doing.
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.
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
The long term uptrend stays in track as momentum slows and small pullbacks take hold.
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.
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.
The $QQQ bounced off the 10 day sma a loss of that level and the 21 day ema is the next level of support.
The $IWM next level of support is the 200 day sma then the 30 RSI on the daily chart. Both very high probability entries.
WS in state of shock that Bezos refuses to play their game although he hasnt played it in 14 years. $AMZN
— Alan Farley (@msttrader) July 25, 2014
If you can't test your trading system what makes you think it will work going forward?
— David Stendahl™ (@David_Stendahl) July 25, 2014
OBAMA SAYS FED HAS ‘PROPERLY FOCUSED’ ON UNEMPLOYMENT… Of daytraders
— zerohedge (@zerohedge) July 24, 2014
@SJosephBurns while AMZN looks like a falling knife, BIDU looks like a rocket
— JL (@justinleung2001) July 24, 2014
"Our mind will play games with us when we have real money on the line." Jeremy Wagner
— Jose Luis Urbina (@urbinarestrepo) July 24, 2014
— Douglas Kass (@DougKass) July 24, 2014
@SJosephBurns it rather efficiently made a fool of a billionaire – does that not count?
— Tony Parker (@Toknees) July 24, 2014
Very happy that my day does not involve reporting on or interpreting the events of the day 24/7. Excessive mental masturbation is unhealthy.
— Michael Covel (@Covel) July 24, 2014
New show idea – bunch of trend followers sit around doing things other than trading intraday – call it Slow Money
— Jon Boorman, CMT (@JBoorman) July 23, 2014
Pro Tip: New highs are bullish.
— Jon Boorman, CMT (@JBoorman) July 23, 2014
The trades that scare the shit out of me work the best…
— Andrew Rocco (@AndrewRocco1) July 23, 2014
If you're not long, I imagine this definitely feels like a bubble.
— Irrelevant Investor (@michaelbatnick) July 23, 2014
— Irrelevant Investor (@michaelbatnick) July 23, 2014
« What worries you, masters you. » John Locke http://t.co/wum5B9UHka
— Philosophers quotes (@philo_quotes) July 23, 2014
It's not fear that bugs me here it's complacency.
— Russellmreyes (@russellmreyes) July 23, 2014
When we trade, we must look for the highest probability entries at supply or demand.
— Jose Luis Urbina (@urbinarestrepo) July 19, 2014
RT @systemstrader95 Many still fighting 08 in their heads,convinced they wont get caught again.Mrkts dont beat traders,they beat themselves.
— Steve Burns (@SJosephBurns) July 25, 2014
Would be funny if $CYNK resumes trading after SEC halt and opens at 30-40.
— △ (@mnycx) July 22, 2014
BREAKING: Man with large short position and even larger ego says stock is a short. Subject of short says it's not. Journos drool. Move along
— Jon Boorman, CMT (@JBoorman) July 22, 2014
$662 White ppl good lawd… $CMG
— Sang Lucci (@sanglucci) July 22, 2014
$AAPL earnings tonight could change a) everything b) something c) nothing.
— Alan Farley (@msttrader) July 22, 2014
My own "feelings" indicator is right about 25% of the time, which is why I don't follow it.
— Mike Valletutti (@marketmodel) July 21, 2014
Trader's assessment on Friday was that that MH17 shoot down had little relevance to markets. Now reassessing that assessment.
— Reinman_MT (@reinman_mt) July 21, 2014
@hankmoodyishyou are very jumpy …means you are over leveraged
— DK1 (@canuck2usa) July 22, 2014
The US state department continues its tried and true strategy of relying on YouTube clips to guide policy
— zerohedge (@zerohedge) July 22, 2014
"Bill O'Neil will tell you that shorting is about three times as hard as buying stocks." – David Ryan
— Andrew Selby (@DontTalkStocks) July 22, 2014
— Ryan Detrick, CMT (@RyanDetrick) July 23, 2014
"But how can the market still go up when 'x'?" Because 'x' obviously isn't relevant. Price is all you need to know. Let that be your guide.
— Jon Boorman, CMT (@JBoorman) July 20, 2014
@SJosephBurns I'm always wrong, occasionally I'm wrong about being wrong.
— 72-16-24 (@72_16_24) July 20, 2014
How to improve Buy and Hold: BUY if it's in an uptrend, and HOLD until it's over. We call it #TrendFollowing.
— Jon Boorman, CMT (@JBoorman) July 19, 2014