It was May 12th 1999 and I was trading 30 Year Bonds at the time. Long the market with price running in my favor; things where looking great!! But all of a sudden the foundation on my long play started to buckle. Price began dropping dramatically! WTF!!! The dollars I was up evaporated and now were running substantially negative. Instead of taking the loss I elbowed the guy next to me and asked “What’s Going On?” He didn’t know… WTF!!! In my hesitation and stubborn mind-set to admit my loss, it grew to a larger deficit because like everybody else we have this deep desire to know why we are wrong and do everything in our power to not admit it. Sound familiar? This is not what champions do! But every champion needs to learn this very lesson I learned 12 years ago. My hesitation angered me upon reflection that evening, because I didn’t need to know the reason why in the heat of the moment; price action told me something just happened. I’m sure if you were in the middle of the Iraqi desert and somebody started shooting at you, your first instinct wouldn’t be to ask your buddy, “Whats Going On?; your initial reaction would be to duck and hit the dirt to avoid getting hit. After watching and actively trading in the market, you build a sense of when something is up. Well in this case the Treasury Secretary of the time, Robert Rubin decided to resign that day. This created a negative effect on bond prices. Even if my neighbor knew the reason the mere fact of asking while in a position created the hesitation and the increased overall loss.
I learned from that day forward to stop elbowing my neighbor to find the reasons why. I began to cover the bad idea when price action got volatile and turned negative and I began to breath and hang on to the trade if it went in my favor. I asked why later on both accounts. This approach is highly effective because price action always tells you the truth by watching it. It reveals where to buy and where to sell (lows and highs respectively). As price action revisits these areas just remember them and play accordingly favoring the side that is winning. You will also begin to notice when price tends to move at normal speeds (after economic reports are absorbed), fast speeds (during reports or significant world events) and slow speeds (lunch time or bedtime). Watch and remember.
Price never lies to me because I have never met an investor or trader that gets into a trade in hopes of losing money. If you don’t agree with what I just said, I’m sure you will tend to agree with me on this point after I explain it a bit further. When price moves up or down, somebody bought and somebody sold. Money is on the line and the only thing left is to be right or wrong. This is the purest moment as a trader as you are not an arm-chair quarterback anymore. As price moves the winners hang on and might even add more to the idea as their money builds and the losers cover the idea to minimize loss and, if they try again in the same direction they cant play as hard because their resources and nerves have taken a punch to the gut. The losers didn’t go in thinking they were going to lose but they eventually have no choice but to join forces with the winners as their accounts dwindle or margin calls come into play. The losers in reality add fuel to the winners fire! This helps me conclude that price cannot lie. It can get over inflated and you might not agree with it but just try and fight against opponents that have unlimited resources.
People and traders naturally gravitate towards a side, the winning side. Lets look to the U.S. Dollar as an example. It is no real news that it has been getting beat up. Lets compare it to the EURUSD (Euro/US Dollar). Since the EUR is first in the pairing and knowing that the news and the outlook to date have been bearish for the U.S. Dollar in-turn bullish for the Euro. Traders are betting that the US government will raise the debt ceiling and allow the U.S. to borrow and spend as usual in hopes of getting our economy on the right track. Whether you agree with it or not is not the point. If the debt ceiling is raised interest rates will remain low in the U.S., confirming the already in place weak U.S. Dollar trend against other currencies. Now of course if the government and congress fail to act we may begin defaulting on our debt which is something my eyes have never seen. It will be interesting but I don’t think it will be entertaining. Economists say that this can create a reverse effect and cause a spike in interest rates as investors will not be attracted to loan the U.S. money receiving such low rates especially if their is default risk. A dose of higher interest rates in a bad economy would not paint the best picture.
Now removing all of the political game playing and can’t trust a word she said/he said debate, lets concentrate on price as it removes the bias and tells the real story. When money is placed on the table and in play; long or short, there is no turning back. Since we can’t move prices ourselves to the desired spot for entry and exit, we need to jump on the backs and watch where the market movers (governments, banks, large financial institutions, hedge funds etc…) fight for control. As the dust settles and a direction is being established we adjust along the way according to the tops and bottoms that are being established. As the range is identified, I’m sure you all heard of the concept buy low and sell high or sell high and buy low; pick the side of the winners and wait for price action to revisit the last known extreme and jump on board. I have provided an example of the action on the EURUSD to illustrate how you can watch tops and bottoms develop. In this case it has been a better idea to go long the EURUSD based on what price has been doing since January 2011 (see EURUSD daily chart 2011). Now lets look at an intra-day 5 minute chart 07/21/11 and see if we cant identify some short term buy opportunities (see EURUSD intra-day 5 min chart).
Our definition of true happiness is actually trying all of the things in life that you say you wanted to try. The result doesn’t define happiness, but the act of trying does! Whatever you decide to try; you can’t win, if you don’t play!! Prosperity is at your fingertips! All you have to do is grab it!!
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