As I mentioned in my post yesterday, index funds will sell into the market just as readily as they will buy. In the futures markets, unlike stocks, selling is just as easy as buying. The direction is irrelevant to futures traders. Thus, when the market tells us that prices are overbought, we will sell, and do so just as profitably -- and quickly -- as when we buy. Why is it that they only complain about speculators when prices rise? They never complain when speculative sellers drive prices lower!Financial Markets are Like the Seas of the Earth
I think of the financial markets as an immense ocean. As a trader, I'm just a tiny little guy in a rubber life raft bobbing up and down on the financial seas of the earth. My first priority is to simply survive financially to live another day. If I don't properly respect those seas, they will eat me alive! I will drown if I don't acknowledge the immense power they hold. They will humble me, unless I show them proper respect. The oceans of the earth could literally take my life. Likewise, the financial oceans of the earth have the same potential to take my financial life if I don't listen to them and give them what they want.
My job as a trader is to trade with the tides, surfs, waves, and currents of the seas, moving in tandem and in harmony with them. In his book, "Trading Chaos," Bill Williams says that our job as traders is to give the market what it wants. Too many traders try to tell the market what they want, and can't ever quite figure out why the market never gives them what they expect.
Imagine the consequences of a person in a life raft on the open seas, if that person tried to tell the ocean what they wanted. That person might jump out of the life raft and "swim for shore" -- even if it's 200 miles away through wind, fog, and rough seas. That person might try to ride a shark or hitch a ride with a whale. (Jonah's whale was a rare exception. His was a divinely-commissioned leviathan.)
The idea seems silly, doesn't it? But I see traders do the equivalent all the time! If I tell the market that I will set a stop loss of XX ticks, and then sit and wait for that stop to be taken out while the market moves against my position, or by capriciously deciding that I will get out when I have XX ticks of profit, I am dictating to the market what I want. What if the market wants to give you 20 or 30 ticks of profit, and you exit with only 10? Let the market tell you where to set your stop losses and when to get out. If your trading method doesn't allow for that flexibility, then you may as well swim with the sharks, because you're going to get eaten! And believe me, it's painful to be eaten alive! I know what its like to eaten alive financially!
This is one reason I don't try to predict market moves.
During market turbulence, when it is unclear what the market wants, I sit the market out or I find another market ocean to swim in. This is what the market pays me to do. And its the only way to survive!
Trader's Bias Vs. Giving the Markets What They Want
If I have a bullish or bearish bias, then it predisposes me to what I think the market is going to do. Then, I will have a tendency to be blinded to what the market is telling me to do, and I will tend to make mistakes. This is completely the wrong approach. Instead of me telling the market what I think and what I want, I need to be listening to what the market is trying to tell me. I need to be listening to what the market wants, not what I want.
Remaining unbiased to what the market is seeking to tell me, I believe, is an important skill for a trader to have. It is also an incredibly difficult one to learn, perhaps even impossible. Perhaps it is not possible to remain completely unbiased. Sometimes the best we can do is to simply be alert to our biases, thus nullifying their affect on us, rather than to completely eliminate them. I catch myself by noticing my biases -- opinions -- all the time. One way that I am alerted to my biases is when the market surprises me. How can I be surprised unless I hold an opinion about what the market is supposed to do?
Of course, sometimes market shocks occur, and the market will make moves that catch everyone off guard. However, I have noticed that the better I control my expectations of what the market is supposed to do, the fewer are the times that I am surprised. I can nullify my expectations, or at least hold them in check. This way, I can be prepared for anything that the market wants to tell me to do. One of the 5 Fundamental Truths of trading from Douglas' book, "Trading in the Zone" is:
"Anything can happen."
That law is so incredibly simple, but so immensely powerful, once correctly understood and properly applied. As a trader, I must always be ready for anything! That is the essence of my philosophy and methodology, which I call "trading dynamically".
