If you were trading the Nasdaq futures on Tuesday, as I was, after a brief sell-off the market rallied all day without much of a pause. The uptrend was surprisingly persistent, easily overshooting R2.
Several clients of mine were caught short at the 10 am EDT reversal and continued to anticipate an imminent bearish decline throughout the remainder of the day. They found it impossible to give the rally credence.
How do you react to market behavior you are not accustomed to? Or to behavior that you don’t expect because it doesn’t accord with your ideas about how the market should behave today?
Most traders have difficulty with bracketing our cherished opinions and expectations. This is one reason that markets can trend so strongly with hardly a pullback. They rise on the short covering of skeptics.
So, how do we outsmart ourselves and miss the obvious?
The market environment is like a Rorschach ink blot. The images we see moment to moment, and the story we tell ourselves about the market’s character and intent, are entirely of our own making, but we don’t entirely realize the consequences of the fictional overlay.
But, the plot matters. If a trader regards Tuesday’s market action as a brave foray into new high territory, she is more likely to buy the dips in order to participate.
If, on the other hand, one regards Tuesday as a pitiful example of irrational exuberance and potential entrapment (“Don’t get fooled again!”) a trader is more likely to try to pick the top and sell weakness rather than buy it.
We have two options here. Either we become more flexible and adjust our story to fit the market, or we take the Zen approach and drop our stories altogether. Kwack!
Personally, I prefer the Zen angle and that means relying on indicators instead of intuition. In trading, intuition is usually an educated guess colored by unexamined emotional biases. Indicators can take the bias out of the equation and give us a better chance of actually perceiving and trading what will soon be obvious in hindsight.
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Join Dr. Kenneth Reid, a trading coach, each Wednesday on TraderPlanet.
