When I am not writing or not looking at my charts, I often roam around various forums observing behaviour of other Traders. And one of the behaviours that I noticed is that some traders are awfully stubborn. Yes, I meant what I said. Sometimes, when Traders have a bias on a specific direction in the market, they pursue it with an overly strong will. In fact, sometimes, it goes beyond what is necessary. And that leads me to my topic today. Trading with a bias is great. In fact, that’s probably the right approach to trading. However, amateur traders also need to know that when the bias becomes invalid, they need to switch. On other occasions, an Amateur Trader would take a long position, get stopped out and take a short immediately. The market then consolidates before going long again. Of course, at that point, the trader would have lost a few trades and, frankly speaking, he/she is no different to a gambler in the casino. With that, I hope to make you aware of 3 points when we switch our market views. 1. Market Conditions are like Cars Switching Lanes Let’s take this one step back and let me explain this a little more. Market conditions predominantly can be categorised as Trending, Reversing and Consolidating. However, these conditions changes from one to the other like a Car Switching Lanes. And I deliberately chose this analogy because some drivers signal before they switch a lane and sometimes they don’t (and it’s more frequent in some countries than another). The thing is, it’s great if the driver uses his/her indicator – i.e. it’s great if you can find clues when the market is reversing – but sometimes, that just don’t happen. And if you are not alert enough, accidents happen. As traders, we should be aware that market conditions are constantly changing and we should find “Clues” indicating that the market condition is changing. So, be prepared to switch. However, there will also be days when “accidents” are inevitable. Hence, good Exit Management (click here for relevant article) is crucial. 2. Pre-determine Reasons that Invalidates Your View If you have a solid reason to support your view, that is great. In fact, you need to commit to that view and only take trades in that direction. Unfortunately, the sad thing about Traders is that they can be so emotionally attached to their views that they overlook reasons for going the opposite direction. Many amateur traders forget that if there is a valid reason to go long (on an asset class), there will always be a reason to go short. Hence, the point that I want you to think about is this: “If you have a bias in a specific direction, what would invalidate this bias?” And you should established these reasons before you take your position in the market. 3. Long or Short but never forget Neutral As mentioned above, it’s great that traders (1) accept that the market condition changes and (2) find reasons to invalidate their view. However, amateur traders should also avoid having the tendency to jump from a “Long” view straight to a “short”. They forget that, more often than not, the market consolidates before making its mind up. Remember that there is nothing wrong with having a Neutral view. In fact, we should think like a professional trader and only take high probability traders i.e. ignore trades with a Neutral view. Conclusion Professional Traders are determined, flexible and adaptive. And this applies especially when they enter the market. There is no crystal ball telling us what will happen tomorrow and, hence, we should be able to switch our view of the market with ease. I hope the 3 points above should explain why and how we should learn to switch our market views. We must to learn to be adaptive in order to stay intact with the ever changing market place. Thank you for reading and I hope you’ve enjoyed this article.
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