Mental Flexibility Is A Prerequisite…

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Yesterday our Best AM Idea was to short AMZN for a potential 4-6 point downside move. AMZN had failed to participate in the tech rally during the last week and seemed to be setting up for some serious downside. I got short at 117 and caught about 1.5 points of downside. The volume wasn’t great so I was somewhat suspicious of the down move.

Today as the market opened AMZN showed some weakness again so I got short. I really wanted to see the volume come in today to convince me that it would break the key 114 support area. Well, the volume did come in eventually after 10:00AM as AMZN ran up from 115 to 116.25. I covered my short above 115.50 and continued to watch AMZN trade. Based on what I was seeing on the tape I switched my bias to the long side.

I announced to the desk that I no longer believed AMZN was a good short. I bought it into the pullback to 115.50. I was prepared to hold at least until 117. If it continued to show strength in the afternoon I figured it could trade as high as 118.50. Once AMZN traded up to 116.60 I felt that the uptrend was firmly in place and I thought it would easily break through 117.

As usually is the case I had several meetings that I needed to attend during the midday so I set a stop order below 116.18 and left the trading desk. As you can see from the chart below I was stopped out at 11:30 when AMZN traded down to 116.06. When I returned to the desk AMZN was trading at 117.40 with its uptrend still firmly in place. So I bid for some stock and got long at 117.29. I was able to catch the up move to 118.

I was speaking with an experienced trader recently who told me that he believed that a huge problem among traders is that they are wedded to their trading biases. I was surprised by his comment. How could individuals whose livelihood was largely dependent on their ability to observe data in an objective fashion be overly stubborn? This made no sense to me. Perhaps experienced traders are so skilled in their risk management that they can continue to be on the wrong side for an extended period of time without ripping up large sums of money? I’m really not sure. But I do know that having the mental flexibility to change from long to short or short to long is a much more sane way to go.

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