I have dealt with futures traders for more than 30 years and I continue to see the same flaw in their trading approach that limits, if not prevents, their success.
And, no, it is not using stops as most would think even though that fatal mistake ultimately has only one outcome. What I continue to see more frequently than not using stops is the following mindset: I hear it all the time, “I think the market will do,” or “I know the market will do.”
Of course, many will say, “well isn’t that what you’re supposed to do?” No. That is one of the biggest misconceptions traders have and it puts them in a mindset so that they cannot “see” what the market is really trying to do. I keep telling traders, “The market isn’t interested in what either you or I think. The market is only interested in what it is trying to do and will do what it wants.”
When I ask a trader why he thinks the market will do this or that, their usual response is “because I think.” All they are doing is letting ego and emotion rule their objectivity so that their personal opinion prevents them from being open minded to the market and its subtle changes. They ignore what is staring them in the face when in reality they should be paying attention to the market and what it is saying, not what they personally think. Be open minded, learn to read the market and put aside your own ideas.
Here is a good example that occurred just recently with gold (COMEX:GCQ14).
Almost every trader out there has been bullish gold without paying attention to what the market has been saying since early this year. At that time I started to point out in my newsletter, Market Update, what was changing in gold technically that was making vulnerable the normal support areas that have held the market for the last two years.
Specifically that certain technical supports, i.e., the 20- and 10-day moving averages on the monthly chart had shifted from being under the market for support to over the market, becoming resistance.
When the market failed those supports on the monthly chart, technically that suggested more selling could occur and it did. Also the long term trend line that was formed since the 2008 low had been violated and confirmed as well. These were all a red flag for gold. So when gold, once again, sold off to that previous support in February of this year, that previous key support no longer had the positive technicals under it for support. Technically gold was suggesting a potential sell off to 1500.00 and even possibly 1400.00.
So what did most traders do? Ignore the market action of gold, of course, and continue to be bullish. Because “they thought.” Why? Because they had gotten themselves into a mindset that was blinding them to the reality of what the market was trying to tell them technically. With the extreme sell off that finally came on Friday, the reality of that flaw in their trading approach has become more than apparent.
When I first got into the business I was green as grass as most new traders are. I was fortunate enough to have a very good and experienced trader to teach me the basics of trading. When I first came into his office I brought along the Wall Street Journal. He looked at me and asked why I brought that. Being “green as grass” I said so that I would know what the markets are going to do. He took the WSJ and threw it into the waste basket. “Judy,” he said, “what you read in there is already in the market. Just listen to the market, it will always tell you what it is trying to do.”
(If you would like to receive a free trial subscription to my Market Update that reviews all the markets and along with trade suggestions, register on my website: www.tradingfuturesmarkets.com).