S&P is a Short!
I know it sounds insane and yes it is a darned aggressive stance to take. But last week closed with a sell setup on the weekly timeframe, the first sell signal since January. That is what the system says, so who am I to argue. The system is right around 8 times out of 10 and if I traded based on emotion I certainly wouldn’t be. That’s why we use a model in the first place after all, to prevent our human shortcomings getting in the way of success.
There have been a few sells on the daily chart in recent months which have led to retracements only. This weekly setup might be just the same, there is just no way of telling if we will get a retracement only or a more significant turn back down. It might not even work at all.
Here’s the catch: We have a sell setup, but at the moment no entry trigger. In my book a trade can only be taken if there is a valid setup and then an independent trigger to execute the entry. Using a trigger prevents a trader from jumping the gun and that leads to significant improvements in performance. What we really need is one more week for this to properly “ripen”. A down close next week would probably be sufficient to have the system pulling the trigger.
So if its important not to jump the gun, why am I? Well actually I am not as I don’t actually trade on such a big timeframe. But I am putting both of us on notice that there is a sell setup in place now, so this is a time to be very cautious with long trades and to be open to taking short setups on smaller timeframes if they occur. My fear is that this could kick in early and waiting for next weeks close means we could be entering way lower. Instinct tells me that there are going to be a whole heap of sell stops in the 1060-1070 region. If a few big ones get elected they could easily trigger more and result in rapid escalation as everyone heads for the exit ramp all at the same time.
I could be totally and utterly wrong of course and the sell signal itself might not get formally triggered at all. My gut says we are reaching a significant inflection point in many of these markets. But I have to ignore that and go with the system and that says wait for next Friday and see if we trigger. Darn it so what should I do?
I have concluded that last weeks and high and low should be used as key reference points. If we trade above the high, the sell signal would be invalidated anyway and the market should then continue with more of the same low volatility crawl that recent weeks have seen. If we slice through last weeks lows with good momentum on an intra-day timeframe and accompanied by high volume, then we could well be off to the races and short-term bounces will become short entries. I would then look to build a longer term position by following my usual short-term scalping signals and rather than exiting each trade completely, leaving just a tiny piece on each time in case this thing finally cracks hard.
At least that’s how I will be playing it, whilst my system will be waiting to make its mind up on Friday night. Of course if I’m right I’ll be telling myself “well this is a thinking persons game” and if I’m wrong I’ll be saying “follow the damn system!” Choices, choices! There are so many ways to skin a cat (as the rather ugly saying goes). Anyway I hope this internal debate I have been having with myself today might give you a few ideas to think about yourself.
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Copyright © Simon Townshend Ltd 2009, all rights reserved
At last there is life!
I had an email from a newsletter subscriber a few days ago, asking me where I am and what I am up to? “I haven’t heard from you in several weeks”, he wrote. “Is everything OK?”
Well yes I am just fine and yes I have been quieter than usual recently. The reason is simple – there hasn’t been anything much to say. As I said when I started this service, I’m not in the business of writing for the sake of it. When there’s a lot going on I’ll happily put out a newsletter several times a month, but when things are quiet there is no point wasting my time writing or your time reading. It is not everyone’s philosophy I know, but it is mine.
Over the last few weeks most markets have been on their summer holidays it seems. In fact September was the quietest time I can remember for ages with virtually nothing worth doing in any market. This can be very frustrating for many traders, especially newer traders who are champing at the bit wanting to trade. But experience shows that such times just have to be endured. You cant make a market come to life and your choice boils down to just a couple of alternatives:
- Sit it out patiently awaiting better times and just accept you cant do very much to make money safely. The odd few reasonable probability trades come along, but they are few and far between. Successful traders know this and accept there are periods when you just cant make the money you may feel you are entitled to be making.
- Or you can force a few trades. You have chosen to be a trader and that’s what you are darn well going to do! Sadly this is a trap so many people fall into, especially newer traders. Usually the outcome is quite the opposite of that intended and money is lost.
OK, before you swear at me let me point out I have done it as well! In fact I would venture that every trader has at some point allowed the gremlin on their shoulder to overrule their normal sensible disciplined self and forced low probability trades in an environment that should never have been touched with a barge pole.
Having paid those “tuition fees” the question that really matters is “did you learn from the costly lesson or not?” The long term winners in this business are those who are prepared to make mistakes but having made them once ensure they are never repeated. Sadly so many people make a mistake, pay the price but don’t learn from the lesson that they would prefer never to have enrolled for.
Worst still a few will actually go further in the wrong direction by knowingly repeating the same mistakes over and over again having convinced themselves for some reason that “this time will be different”. It wont be!
In fact the very worst outcome of all is when such a forced trade does actually pay off once in a while. This positively reinforces the bad habit that so desperately needs to be exorcised. Now our trader is in real trouble. He (or she) is no longer a trader. He is now nothing more than a gambler driven by exactly the same misplaced beliefs that cause gamblers to enter the downward spiral that eventually leads to their demise.
But it is perfectly normal to make a few mistakes, a lot of mistakes actually. I have made more mistakes in the 28 years I have now been trading than I care to imagine. I regret every single one of them, but if I have learned from each mistake then I have at least come away from the experience having received something valuable in exchange for the money it has cost.
Occasionally you may repeat a mistake before you summon up the discipline to accept the learning that you have now paid for two or three times. That’s OK, we are all human so it happens. Just work to ensure that you don’t repeat a mistake too frequently before banishing it for good. I like to look at it this way:
- The first time you make a particular mistake, you learn something about the system, the trade set up and/or the environment in which it was made.
- The second time you make the same mistake, you learn something about yourself as the trader, about your feelings towards the trade and about your level of discipline.
- The third time you make the exact same mistake, you learn that you are at a crossroads in your career. Are you to continue as a trader, or drift into becoming a gambler? Only you can win the mental game of trading, no one can do that for you. So do you exorcise this particular demon once and for ever, or simply close your account and go and get a new job – you really are at this decision point, so you better give the right answer!
Times like we have witnessed this summer appear to be so benign to the outside world. After all nothing much has been happening right? Yet it it just such times that can make or break a trading career. If you have achieved a break-even result over the last 3 months, or come close to it, then you have actually done very well indeed. Many traders have had a really rotten summer.
But there is light at the end of the tunnel. These things always seem to go in cycles. With so many markets having had a really quiet summer, many have now jumped back to life and opportunities are flooding back. Having stared at a pretty blank sheet of paper for several weeks, we now have 16 markets on our watch-list. That’s a lot. We usually have 4 or 5 markets that we are stalking at any point in time. The summer drove that way down and now suddenly the elsatic band has snapped back. Everything is set for a busy end to the year.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2009, all rights reserved
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