Sunday, August 03, 2014

Think for yourself, and follow your own plan

Given the gyrations in the markets last week, there is wildly differing opinion in the blogosphere and on social media over what may or may not happen in the coming days and weeks. No surprise there - most people like to have an opinion, and are not shy in putting it out there. Whether it is beneficial to you is another question.

Some are saying this is just a pullback and a potential buying opportunity, others saying a new downtrend starting - I even saw one blog post saying there's a potential crash on its way.

In a lot of cases, it's an ego thing. If price does what they said, they will be full of themselves, proclaiming to be some sort of expert. Well, consider the case of the top callers in the US indices over the last 18 months or so, saying the market top was in, only for price to carry on upwards to new multi-year or all-time highs. Even a broken clock is right twice a day.

In reality, what 99.9% of other traders or market commentators out there may think or believe is totally irrelevant to you and your own trading.

You should have confidence and faith in your own approach to the market. Only you know what your parameters and timeframes are, what your appetite for risk is, how you define a trend, whether you prefer to enter on breakouts or pullbacks etc. In all probability, you won't know all those elements of another traders' approach.

In a way you should welcome people who have opposite views to you. If you have a method with a positive expectancy, you need people to be on the other side of your trades. They will add fuel to your trades if they start to go in your favour.

Someone who trades a long breakout will gain from those who were trying to pick a top having to cover their short position. Those holding a short position on a downtrend will profit from the knife catchers trying to catch the bottom of a price move who have to bail out.

It is for these reasons that I follow very few traders on Twitter as I don't want the opinions of others clouding my own judgement or thought processes - those that I do follow tend to have a trend following or momentum style approach similarly aligned to my own.

Even then, I have to be careful. While I have been cautious for most of 2014 so far, some trend followers I know have serenely carried on trading predominantly on the long side, because they use a longer-term timeframe than me. Others have been cautious the last few weeks because of price action in the indices. One trader I know who trades shorter-term trends on the indices is already trading on the short side.

My own approach is towards the shorter-term end of the scale. Therefore, I tend to get into new trends earlier, and get an exit signal earlier. Against that, I am more prone to being whipsawed around or getting false signals. But, because my own approach will generally have tighter initial stops, I may be able to generate the same profits in terms of R holding a position for a few weeks, that someone else may get by holding a position for several months.  Neither approach is wrong - it is what you are comfortable with and have formulated your trading plan around.

I do not have a crystal ball, let alone one that works, so I absolutely no idea what will happen. All I can do is play the odds based on my own method, control my risk, and see what happens.

Remember that trend following is a reactionary approach - we let price tip its hand, and only then do we commit to trade based on what we have seen, based on our chosen timeframe and parameters. We do not need to predict or have an opinion.

What is unarguable is that, when a big trend does take off, at some point or other all trend followers will get an entry signal - only the timing will be different. What is also true is that every big trend starts out as a small trend, or as a correction to a preceding trend in the opposite direction.

Who knows what will happen over the remainder of this year? If your have own action plan ready, then most of the predictions or opinions you will come across can be ignored.

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