Another draft post I’m going to go ahead and publish now. More to follow.
There are many ways to be wrong in trading, but here are two big ones:
1. Any time you use a trending strategy in an oscillating market you will be wrong.
2. Any time you use an oscillating strategy in a trending market, you will also be wrong.
This is where the oft-repeated platitude “Trade what you SEE, not what you THINK!” breaks down for me. A price level is “seen”; it is self-evident, and as long as the price quote is genuine, it an indisputable, objective fact. In order to act on this information, however, you have to “think” something! You must interpret the price level as either too extreme (oscillating, fade it) or not extreme enough (trending, follow it). Now we delve into the realm of opinion, the land where large number probabilities and the next trade win/loss binary play out. But the truth is this: You cannot put on a trade without making some kind of interpretation of data.. You have to see AND think. I believe the fallacy comes when you try to see AND think at the same time. Without making a well thought out plan before you go to trade, you are more likely to be influenced by emotion and other human biases and be caught on the wrong side of a trade.
I believe that the market hours are for seeing and trading, not thinking. If you want to think and plan during market hours, then don’t trade. The thinking should be done beforehand, via a consistent, disciplined, and tested trading plan with definite setup conditions. Again, you MUST think something at some point to interpret price and take a position. Instead of “Trade what you see, not what you think”, I believe the better mantra for trading is “Plan your trade and trade your plan”.
More to come…