Markets Are Like A Mentally Ill Person
Corona Del Mar, CA
Howdy Friend!
One of the most bizarre follies of millions of traders is how so many failed to notice price action changed in 1982. Markets used to trend more up until the advent of index futures. Then they became like a mentally ill person. One day everyone hates the stock. The next day it's unicorns and rainbows.
Case in point: Here's the Old Dominion (ODFL/DOG) strategy I gave to members on my birthday:
A week after the buy signal, price hit an air pocket. This is where most traders will say “OMG, the trend is broken. Sell.” Smart traders, those that test to see what works instead of assuming all the old books are correct… well, we know that price over-corrects to both the upside and downside.
Often times, we'll be buying on red days, and selling on green. Sure enough, price action popped back up and those trading the strategy had their sell limit order hit for a breakeven trade.
While most view price action in terms of trend lines, Fibs, and chart patterns, I simply take a 4 or 5 day moving average and look how far away price has moved. That's a much better gauge of “over-sold” or “over-bought” than anything else in the books.
Even though most of our edge comes from using TAP data, there are still many strategies that use limit orders and mean reversion. This typically manifests as a limit order to buy under the closing price, and a limit order above the closing price.
Here's something strange but true: I've discovered that often times the buy limit order will use ATR (which adjusts for the instrument's volatility) while the sell limit order uses a percentage. I don't know why that is, but that's what works. It's hard to argue with sound statistical evidence.
As far as the markets are concerned, I'm seeing sector rotation out of tech and into the broad market. These things mean revert too. Tech will be hated, then suddenly loved. The broad market will be loved, then hated.
If you don't get this observation of how the markets really work burned into your skull, you will forever be left scratching your head in confusion.
So if you still have any remnants of your old bad habits, clear 'em out of your noggin' a replace those thoughts with empirical truth.
I hope it helps!
Trade smart,
Dan “Prince of Proof” Murphy
You get paid when others are fearful
You get paid when others are fearful
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