Standing in Front of a Freight Train

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I am not sure why but too often traders fade moves like yesterday into the Close. The market bounced over 800 points during the last two hours of trading. I was talking with an experienced trader after the Close and came up with a theory. Traders tend to miss the beginning of bounces. The market has been weak. The market has been volatile. Strong moves have been followed with weak moves. Then they see others around them profiting from the last strong upmove. They want to make some money. There is an instant need to make money. But it is hard for them to get long at these levels. And so they short into any signs of slowing with the market. Wrong. Bad trading. This is like standing if front of a freight train.

Standing if front of a freight train? This is what you are doing if you try and fade a move like the one we saw into the Close. Look a market that goes up 300 points can go up 500 more. Oh wait that just happened. Don’t fight the tape. When you spot the strength focus on buying into the pullbacks. When I see the strength we saw into the Close I almost feel like standing up and shouting, “NO SHORTING!” Actually SMB started at a bigger firm that was mixed with other firms. A head trader I deeply respect would in fact stand up and yell to his traders, “No shorting.” And anyone caught shorting was kicked off the desk. Nothing like some Old School training techniques.

An experienced trader will find shorting opportunities even during a market bounce. However, traders often under value opportunity cost. Your focus is finite. If your mindset is to short/long during a bounce then you are minimizing your attention for some longs. When the market is bouncing the money is buying into the pullbacks, adding to your positions, and holding. Why expend mental capital trying to catch a 50c downmove into the bounce? Focus on the next two point upmove.

For those who underperformed into the Close were you mentally prepared? Did you consider the possibility of a bounce? Had you visualized the trades you would execute if we bounced? If not then you ought to be disappointed with your preparation. Don’t be disappointed with your P&L. It was your preparation stupid! (sorry it’s the political season) With this market you must walk through the different possibilities that the market may offer. You must visualize the different trades you will execute and with what stocks. Then your mind will be prepared for a bounce like we just saw. Then you will be less likely to underperform.

We are most likely going to have many more bounces over the next six months. Think about what you did well into the bounce and do more of that during our next bounce. Think about the things you need to do better so that you will. And then do them.

For those who underperformed I will share a lesson I have learned over the years. No one day will make your trading career. There will be many more great opportunities. Just work on getting better. And please next time don’t stand in the front of a freight train.

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