Trying to anticipate a move? Don’t do it — wait for confirmation.
Anticipation, Anticipation – Is making me late, Is keeping me waiting — Lyrics from Carly Simon
There is not one person who wouldn’t love to anticipate a move, get positioned correctly and then actually make some good money on a trade. But, that is really just guessing, and frankly there is no better than a 50/50 chance of being right. As much chance as calling a coin flip. Some will get it right, but some will also get it wrong. Being right only half the time at best is not what I consider successful in the game of trading.
But in this very odd market where divergences and patterns pop up constantly we tend to look ahead and try to predict the future. That’s all fine and good, but to do so without evidence or confirmation of the first move is a bit foolhardy.
Recently, lots of chatter about a ‘potential’ bearish head/shoulders pattern in the SPX 500, and the Nasdaq. The pattern was looking good, but it had not yet happened. And after Thursday, it appears that it won’t occur. What if you prepped yourself for it? You now find yourself behind and potentially squeezed.
Easter week, markets were up every day and the following two days after the holiday. Seemed an all clear, but yet there was no confirming volume. Later in the week, markets were slammed hard.
Why wait for confirmation? After all, a big move up in the market on sizable volume should be enough of a clue, right? Well, looking at the charts we find that the first move can be a fake out – and many times it tricks us into getting onto a trend that really is not there. This is akin to looking for tops/bottoms – historically a loser’s game.
I will always miss that first move up or down, as I’m looking to play a trend move. I look for momentum, strength, power and speed – which mostly occurs in the most reliable part of a stock’s move – the middle.
As an options trader, trying to catch a bottom or top is clearly the wrong approach. We have to not only be correct in picking direction but also right on time. Therein lies the issue – How do we know a bottom or top is at hand? Answer: We don’t know, but waiting for a few more days or time bars may be the ticket to confirming a move.
= = =
Bob Lang has been managing private options trading accounts for clients since 2004 and providing subscribers with guidance on trading options for income at Explosive Options since 2011.
RELATED READING
Learn more about options in the TraderPlanet Journal.
