Here’s the thing about trend chasing that bothers me. It’s an obvious circular reference. You’ve got one guy who says, “Hey, I’m gonna buy some stocks today, because they look good,” and that creates the first price movement. Then you have five more guys who go, “damn, trending up,” and they dive in.
So 20 more guys, watching the first six having made money, go, “wow, the trend is your friend,” and they buy.
Now the first guy, who was only buying to take on some risk anyway, says, “well shit, that’s nice, profit taking time.” Some of the 5 bail with him.
Then the trend is established, so it’s a dip buying opportunity. The 20 latecomers gobble up some more.
At this point, the paychecks of the first five have been deposited, so they throw more money, following that initial trend.
The 20 splinter and maybe 10 of them buy some more.
There’s some profit taking, some more dip buying, some more profit taking…you get the point. But the valuations are almost entirely self-contained to the original group, who are playing chicken with a knife and the gaps between their fingers.
And where’s the payoff? If you’re stuck with these stocks at these prices, how do you make out? Half of these cinder blocks, hardened by now around your ankles, don’t pay shit, and won’t be worth these prices in your lifetime. Where are you going when the flood waters come?
Yet in spite of these questions, I have to listen to hundreds of traders daily talking smack. I get to hear the same quote subtly refurbished dozens of times.
“Don’t fight the trend.”
“Follow the price action.”
“The guy who does what he believes rather than follows what he sees is broke.”
“The trend is your friend.”
ETC.
If I was handed $1,000 for every time some punk quoted John Maynard Keynes, telling me how irrational the market can remain, I wouldn’t need oil to correct to get me back to where I was this time last year.
The point is: this type of logic, based off of price action, is reflexive. You need to remember that, when rubbing mud in the eyes of people not willing to commit their life savings to your methods. Whether you’re making one line, fifty lines, one hundred lines…infinite lines (fancy mathematics here) – you’re still doing the same thing; projecting.
If you’re making money, congratulations. But at least acknowledge that what you’re doing is playing “who can stop closest to the cliff’s edge.”
And just like all the other times it’s happened over the last two years, at these speeds, you’re going to wake up one morning to very spectacular losses. If you’re ahead after everything, good for you. But my guess is that some of you are “protecting” yourselves with stops and trailing stops which, if we take a hit big enough (think flash crash), are going to aid in wiping out everything you’ve made since October.
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good post Cain. sitting 50% cash and have certainly been tempted here in the last few weeks.
just wondering when the dip buy fails?
About the only thing nearing the range of long-term lows today is NUGT…but you’re right it’s like catching a falling knife since NUGT and the rest of the leveraged ETFs are highly concentrated into the hands of momo traders. At least where we are now near $21 any downside would be small and brief.
Hi Cain:
Nice post, meant to thank you for the BG bucks. Bot some when you were bailing a few weeks ago and sold yesterday.
I doubt it. It’s far more likely that you are just being an ass.
But hey, next time alert me when you’re buying, not “after.”
Guys who obsess over trend lines and moving averages tend to be bearish at every bottom, and bullish at every top. No surprise here.
Also you forgot
“Be long or be wrong”
Truth is there are GIANT bearish ascending wedges in almost every index. And they are confirmed by steeply declining volume. Charts are actually not on bulls side here. Sure, moving averages and oscillators are all pointing up. But, they always are near tops.
panamaorange says:
January 25, 2012 at 4:12 pm
Good chance we printed the highs for the year today
I was never able to successfully “follow the trend” in the way you describe it. I can’t stomach highly active trading strategies that are profitable overall but can have months on end when nothing is working. I don’t mind sitting and suffering for a thesis to work out. But the trade, stop hit, trade, stop hit, trade, stop hit, trade, home run, trade, stop hit etc. makes me go insane.
When it works it really works, but I’ll stick to constructing a solid longer term thesis and trying to come up with 2-3 really good ideas a year.
Give it a few months and everyone will be a regression to the mean trader when things inevitably change.