Here’s an excerpt from my morning note to my clients. As always you can become a client for only $1 – and get 4 weeks access to all my research. It will open your eyes on what really moves the market.
On large up days… Did you ever watch a football game that was coming down to the wire. The game is close and one team is bringing the ball down to score, controlling the clock, and the other teams defense just can’t stop them. Then they do something crazy – the defense will let the team score – so they can get the ball back and at least have a chance of tying the game by scoring on the other end. So the defense just steps aside – as the running back runs straight through the defense and scores.
That’s what Tuesday was like… The bears stepped aside – let the bulls run in and score – give up the short term to try and win the game. They (the bears) will be back today. This is nothing new, it happens quite frequently in the markets (well, frequently from my perspective). And here’s what it looks like:
Remember, the market is run by computers, by algorithms, and they’re all competing with each other for gains. Periodically they will all lean in one direction. Sometimes for a day. Sometimes for a week. Sometimes longer. All these programs operate in different time frames. The short term traders like to make their gains more consistently, in small chunks. Some people are a little more patient, and look for intermediate term opportunities (that more describes the barometer). And even others apply long term algorithms, which function off weekly price action or even longer.
Point is, I’ve been doing this long enough to know that it frustrates you to be short when the market moves up as it did on Tuesday and last Thursday. Even though our position is still profitable. There’s a psychological component to trading that cause us to focus on the money we didn’t make, more so than the money we did make.
Remember, you can always apply your own strategies to the barometer depending on your availability to trade. Tightening stops or taking profits early is something I do with my own trading. But that’s because I’m in front of a screen all day long. I realize most of you are not. And this system was formulated to target the larger moves – and giving up the short term 1-3 day moves. That’s a fun game, but you have to be in front of a screen and migrate down to 60-min charts to really take advantage of it.
Then there’s also the component of short term trading that will wipe you out when you get into significant trends – such as we just went through in the first quarter of this year.
When I developed the barometer system, there are key considerations.
1) it minimizes the number of decisions. The more you trade, the more ‘decisions’ you have to make. That doesn’t make trading easier. In fact, it makes it much more difficult to trade. We maintain an ‘always in’ system, where we’re either short or long. I’m not smart enough to know what will happen next. As soon as you apply that judgment, you’re more likely to miss a significant move in the market.
2) it is a fixed system that targets a certain type of move in the market. You can’t serve all masters when trading. You don’t walk into a casino and go from game to game when one game isn’t working. Learn one thing, and do it better than anyone else. I know that the barometer will catch several of these moves over the course of a year, because they always reoccur. However, if I deviate from the system to try and capture short term moves, and the market goes into a mid or long term trend, then I’ve done wrong by the system.
3) It is an end of day system that waits for the next day to make the call. The process of reading the market is much more complex than just entering a few numbers into a spreadsheet (well, 4 spreadsheets now) and making a decision. I’m a big subconscious, thin slicing, blink kind of guy – so everything I do is about training my brain to see things a certain way. Just like a quarterback watching game film to learn from mistakes, I break down my mistakes when I trade (and advise you). The barometer is the same formula since 2005, with only a few modifications. But the knowledge and experience that’s behind the service has been growing ever since I got into the markets. You never stop learning as a trader.