Confucius wrote that wisdom comes to us in three ways, the noblest path being reflection, the less noble route is imitation and the most uncomfortable road is from direct experience.
When it comes to trading, however, there is no high road to wisdom, no short cut to competency; no substitute for experience.
One reason is that the people who move markets think and act differently than common sense would normally dictate. Aspiring traders from the normal world, therefore, are generally not prepared for the Alice in Wonderland logic they encounter on Wall Street.
Wall Street logic is a quasi-paradoxical mode of thinking that turns common sense on its head. The adage “buy the rumor, sell the news” is an example. This illogical behavior happens because large traders play hunches, they don’t “wait for confirmation.”
WHY IS THAT?
Big boats need to start their turns miles ahead to stay on course. So it is with institutions, which have large orders to fill. If they don’t get in early, they don’t get a good price.
THE FED
Take Wednesday’s tapering announcement by the Fed. Isn’t it something you would think the market would wait for? But look around. It is happening the day after the S&P 500 closed at an all-time high!
Market movers have already positioned themselves for the good news. It’s “priced in.” They bought the rumor early in the month and most likely are primed to sell whatever good news Mr. Bernanke’s accommodating Fed comes out with on Wednesday afternoon.
THIS IS HOW TOP TRADERS THINK
Top traders think like this. It’s not “contrarian” or countertrend trading. It’s simply a tactical approach that buys when people are a bit fearful and uncertain and sells into their relief when confirmation finally arrives.
To apply this principle to your trading, look for ways in which you can be a bit less logical and certain. The increased uncertainty will make these trades feel risky, wrong or premature. After all is said and done, however, you may find that they are the best trades, even though they make less sense.
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[Join us each Wednesday on TraderPlanet for The Dr. Is In column. Kenneth Reid is a trading coach. Please post your questions for him below.]
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