Saturday, October 29, 2016

Playing dumb in the markets

When trading I play dumb. What I mean by this is that I avoid pretending to be 'smart' by predicting what may or may not happen. The people who draw squiggly lines on a chart outlining future price action - how do they know? The future doesn't exist.

So, by playing dumb, I am letting the markets show me the way - I simply react to what is happening.

I am a trend follower, not a trend predictor. That said, I want to get into any potential new trend as early as possible. Given what I said about volatility contraction, getting in early can also mean before the volatility in a stock or instrument can distort the potential risk:reward ratio.

At all times, I am not looking to force my opinions or beliefs on the market. And, for me, the simplest way to do that is by following price, because it is only movements in price that generate a profit or a loss.

It also means that you never try and predict where a price move will come to an end. If you do that then yes, occasionally you may end up getting out near the extreme of the move. That is dangerous - you may think you've outsmarted the market - and your own method. 

But you can guarantee that sooner or later, you will close a trade when no exit signal had been given - for nothing more than maybe a fear of losing open profits. 

You are most susceptible to this when you have suffered a run of losing trades. And that trade may turn out to be the biggest trend of the year - the one which would have transformed your performance. 

As Richard Dennis said when observing price "The correct approach is to say: This structure means up, and this structure means up no more, but never that this structure means up this much and no more."

For a lot of people however, reacting to price is no good - their ego needs them to be able to 'predict' where price will turn. They want to appear 'smart' to others. 

I have no ability to predict what will happen in a given market. All I can effect is my ability to control my risk and follow my entry and exit signals. The market can do its own thing. 

So, for me, playing dumb is knowing and accepting that I don't know. And that (despite what some people may think) gives me an edge.

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