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.”
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.