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Tuesday, February 23, 2016

No you don't

Mark Twain once said: "I was seldom able to see an opportunity until it had ceased to be one."
Sure, rumor has it Mr Twain was not a very good trader, yet this poetic phrase makes all the sense in the world. The majority of retail traders are just band-wagon fans, who thoroughly enjoy joining the party when it's already too late.

Back in early February, many swing traders were saying the market should be shorted on a break below previous support at 1,812. To their pleasure, the S&P500 hit 1,810. Those who shorted then, got their arrières severely kicked. It was late to short at that point.

Later, during the rebound, another bunch of traders, some of which had been part of the previous short squeeze massacre, were saying, you shouldn't buy until the market breaks above 1,950. Meaning, buy only after the market rallies 140 points. Go long then, and not in the low 1800's. Miss a potential 7 or 8% rally, it doesn't matter. Only go long after the fact. Allah has been merciful so far, and hasn't even let the market get there. It would be just too funny to see the market hit 1,951 or 1,952 to only reverse after hordes of traders deploy shiny new and promising long positions.

The point of this simple observation is that, applying strategies that give you some cushion for error is usually wise. Strategies like, for example, the much-maligned strategy of selling Out of the Money Options. It's the reason why I personally trade Iron Condors and Credit Spreads and simply can't stop loving them. They save me from so much frustration and are my most consistent trading technique.

Learning to be a contrarian during market extremes also helps. Doing what mentally hurts the most, while everybody else is doing or favoring the exact opposite. Going long during what based on historical statistics is an extremely pessimistic environment, offers more attractive potential rewards. When you buy after the market has already gone up 7% in 2 weeks, it is usually too late. When you sell after the market has fallen 7% in two weeks, it is usually too late. Someone said the stock market is the hardest way to make an easy living, for good reasons.

When you combine both ingredients: Contrariarism and selling OTM options to give yourself enough room for error, while keeping an eye on your risk as a hungry hawk, things tend to work out in your favor in the long run. It is not the only way to make money in the markets, of course, but it is a decent fit to an environment full of noise, where exactitude is usually super-seeded by randomness. Alternatively, you can be the old trend follower guy, but be aware of the frustration described at the beginning of this article, and according to that, respect your stop losses, and make small bets, so you can be wrong many times until you finally nail it. It's a tough way to make a living, and it reminds me of Yogi Berra and one of his Yogi-isms: "Nobody goes there anymore. It's too crowded!"

Learn to know when it's too crowded. You may think you still fit, usually you don't.


Related Articles:
Smallness: the case against trading excessively small
Cons of Index Funds: The case against Passive Index Investing

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