Tuesday, January 15, 2013

Not fighting the markets

I received an email the other day headed up "Is the fiscal rally for real?" In my opinion, any move, regardless or the reasons or catalysts behind it, be it upwards or downwards, is real. It creates profits for some traders/investors who are actively holding positions in the market, and creates losses for others. Those gains and losses are also for real. How can they not be?

In this regard, as I'm typing this, the Dow is making new 2013 highs, and the Russell 2000 new all time highs. The general market trends are up. To a trend follower, the reasons behind these moves are unimportant. Price is everything. As was stated in Reminiscences of a Stock Operator "...prices, like everything else, move along the line of least resistance".

I am also reminded of the following quotes from two famous traders from their Market Wizards interviews, that should provide food for thought:

"If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try to fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.” Paul Tudor Jones

“If I were buying, my (buy) point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.” Ed Seykota

These thoughts are considered essential elements of a robust trend following strategy. Given the success of thse two traders, and countless others who utilise a similar approach, I'm glad to be of the same opinion. I won't fight the market. I'll just stay biased to the long side until the market conditions change.

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