Trading the right side

“They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”

These are the words of Jesse Livermore taken from Reminiscences of a stock operator. Which side are you trading? Look at the following chart of the FTSE 100 index. It has dropped 182 points. Would you like to be short on this index?

FTSE 100 Daily (Courtesy of Equis)

The answer depends on if you are trading short-term or intermediate-term. What about the Time Frame? Do you know which time frame you are trading in?

What I have not disclosed is whether the above chart is a 5-minute, hourly or daily chart. It could be that the downward movement is simply a pullback from a rising market. Or it could be the start of a downward trend.

How do we address this situation? Let’s take a step back and look at the bigger picture.

FTSE 100 Daily (Courtesy of Equis)

I have now revealed more of the chart by zooming outwards. The timeframe is in fact a daily chart. You can see the circled area is what we just looked at on the previous chart.

To trade successfully, we really need to determine our time frame, which is an important component of our trading plan. Sometimes it is easy to get caught up in the day-to-day movement of the markets without considering the bigger picture.

Imagine that you had already taken a long position at the low point shown in this example. You were already making 312 points. The market consolidated for a few days and then pulled back. Your immediate thoughts would probably have been to exit the market in fear of losing your profit. After your exit, you would have patted yourself on the back for being clever and telling yourself that you are a great trader.

Lets revisit Jesse Livermore and take another quote into consideration.

“The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.”

You see, if your initial view was that the market had been showing a series of higher highs and higher lows which would show an uptrend, then this small pullback would not have been of concern. If your trade strategy tells you that you are trading for considerable movements in the market then you would have been patient enough until the market itself told you that the trend had changed.

However, if on the other hand you are a short-term trader trading the nuances in the market, then this pullback also was an opportunity to capture a small profit on the short side from the market.

Remember being on the right side depends on your time frame but more importantly the right side is revealed by the market - always. Decide before putting on your trade if you are a short, intermediate or long-term trader and trade accordingly.

This is an area that is discussed and taught in the training modules provided at ODL Markets.

 

FTSE 100 Daily (Courtesy of Equis)

Your patience would have been rewarded on the long trade as seen above.

Until next time, I wish you safe trading.

Sandy Jadeja | Chief Market Strategist

sjadeja@odlmarkets.co.uk