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As you’ve probably noticed, things have been rather quiet in this neck of the woods. For the past few days I was enjoying the sun and surf at Kaua’i. I’m slowly settling back into my routine and hope to resume our regularly scheduled programming by next week.
While I tried valiantly to appear like I knew what I was doing, I ended up being tossed around like a ragdoll by the powerful currents off the coast of the Garden Island. In between getting sunburned, swallowing way too much sea water and catching a few precious waves, a few things occurred to me. Like for example, attempting to ride water waves is very similar to riding price waves in the financial markets:
- Be patient, there will always be another wave along
There is little benefit to getting upset for missing out since the waves just keep coming. So what if you missed a trading opportunity? Instead of wasting your energy punishing yourself over it, channel it to finding the next one. There is always one or a dozen around.
- Some waves are deceptively weak and some deceptively strong
Perhaps it was my inexperience but I was surprised by how little I could judge the strength of incoming waves. Some would look powerful only to degrade into nothing instantly. Others seemed to come out of nowhere and push me around like nothing more than mere detritus.
This reminded me of how difficult it is to judge the size of moves and whether we have a secular to cyclical wave. For example, how many bought gold at $300, only to sell at $400 and never get back in?
- Riptide and cross currents can be dangerous!
I knew better than to venture out in dangerous waters seeking larger waves. The locals had no such qualms. So unless you really know the territory, the smarter option is to avoid the risk.
How many traders flit about from market to market? trading equities, one day, currencies the next, cocoa, gold, etc. ignoring that each market has its own intricacies and “locals” who know the conditions more intimately than you?
- Have a safety net in place but don’t take it for granted
Go to life-guarded beaches…but don’t depend on them to save your life. I avoided beaches without life-guards but at the same time, I never took the protection they provide for granted.
How many traders think they are “protected” by having stop-losses only to see the market gap way outside? or how about our all too human propensity to misunderstand probabilities?
- Timing is everything
Knowing when the next wave will come is critical. You not only can save your strength but you can position yourself to ride it at just the right time.
While academics usually sneer at those who attempt to time the market, it is not only possible, it is critical to long term trading success.
- Location is everything
Even if your timing is perfect, you can very well find yourself at a poor location where the water is boringly calm. So even if you’re the world’s best surfer, you’ll be bored to tears if you find yourself in suddenly placid waters.
Of what use is being able to perfectly time the market if you haven’t first identified the market that will move the most? or one that is in a secular trending conditions?
- Finding the sweet spot
Staying close to shore usually gives you small waves (the exception was Kealia beach). Straying out more into the ocean provides more powerful waves but also much more risk. The waters off Hawaii have strong currents, not to mention various species of sharks. One wave smacked me upside the head so hard I thought it was someone’s errant board.
In trading, taking too much risk (or not realizing you’re out of your element) can be extremely dangerous. While things may go swimmingly for a while, eventually, probability will catch up to you.
- Conditions can change in the blink of an eye
The ocean is a living thing so just as you get used to conditions they can suddenly change. Unless you’re aware of this, you can be caught off guard or pulled way out by strong currents.
In trading, once a trend is identified, more and more people pile on, assuming that it will continue and continue. Of course, it doesn’t. Things can change very rapidly, as we’ve just seen recently in the equities markets. Always keep this in mind and as the saying goes, “dance close to the door”.
I’m going to pick up where we left off: the NYSE cumulative breadth had made new highs but I was unimpressed with the action. I’m still shaking the sand out of my swim trunks but I hope to catch up to what I missed and hit the ground running soon.
In the meantime, you can check out the stream of interesting stories that I’ve been reading these past few days over at news.tradersnarrative.com
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