Become a Cliché Trader

The following Guest Post submission is from Dan Giovannetti, a trader in the TopStepTrader program. For more on their innovative program to cultivate and fund aspiring new traders, check them out at www.topsteptrader.com.

 

Become a Cliché Trader
By Dan Giovannetti

Since I began trading six years ago, I’ve heard lots of so called experts recite plenty of advice. Most of the time the advice offered was nothing more than a typical cliché. After a while, I got to the point that most of the advice I was given was all but useless. I was always looking for someone to offer me that one thing that I was missing that would make me a millionaire overnight. What I didn’t realize was that I had what I needed to be successful all along, I just didn’t realize it yet… well until now.

My trading strategy has changed over the years to where it is today. Recently, I’ve been able to mold my trading edge in such a way that it conforms to my risk tolerance and yet offers plenty of good returns. As I tried to figure out what I was doing that was different from my previous failures, I discovered something very profound. And as I examined the qualities of my strategy, I found that I had become a Cliché Trader. Let me explain.

I bet if I asked you to write down all the clichés you’ve heard over your trading career, the list would be very long. I have found that some just don’t fit my style while others simply don’t make sense. Whenever I hear “Buy the rumor, Sell the fact,” I say HUH??? By the time I hear  rumor, the opportunity is long gone. Moreover, since I’m a technical trader, rumors are irrelevant to me. So there are some clichés that don’t work for me. However, I have found there are some clichés that I believe everyone should apply to their trading. The list includes the following:

  • The market is always right.
  • The trend is your friend until it bends.
  • Buy the dips and sell the tips.
  • Buy low and sell high.
  • Support becomes resistance and resistance becomes support.

Here are some of my own made up clichés (I’m not sure if they are clichés or not, but they are
relevant nonetheless):

  • Never trade with money you can’t afford to lose.
  • Never try to be smarter than the market.
  • Never fish the bottom or top of the market.
  • Never trade countertrend.

Let’s talk about how these clichés and principals apply to my trading edge.

First off, I am absolutely convinced that market is always right. It can’t be wrong. The market is where it’s at during any given moment because two people with opposing views agreed to a price and initiated a trade. This process continues perpetually and the price reflects the market sentiment as time goes by. Therefore the market is always right. It’s our job as traders to get the same mindset as the majority of traders that make up any given market so that we can put on a position that is favorable to the current market sentiment. This brings me to cliché number two; the trend is your friend until it bends. If the market is moving up for most of the morning, why would you want to short it? This makes no sense to me unless you feel charitable and wish to give away some of your money to others in the marketplace. Remember, the market is always right. So until the market tells you it’s going the other way, why would you assume you know more than the market?

I guess while I’m talking about this, I can add three of my four personal clichés to the discussion (Never try to be smarter than the market; never fish the bottom or top of the market; and never trade countertrend). If the market is always right, why would I want to trade against the trend? By doing so, I have decided I am smarter than the market (which is always right!) How can you be smarter than something that is always right? The answer is YOU CAN’T! The same concept applies to fishing for bottoms or tops of the market. To think you know the exact point a market is going to stop climbing or falling is making the assumption you know more than the market does. Sorry, but that simply isn’t true. Whether you are looking at a lagging indicator (MA’s, MACD, stochastics, bolinger bands, etc) that all try to suggest that your symbol is overbought or oversold or simply analyzing changing volumes; I have found that all these indicators are not very effective at predicting when change is coming. In my opinion, only price action can tell you that. I’ve seen and heard of more traders getting blown out by violating these principles than anything else.

So if I say you shouldn’t fish for bottoms or tops, then why do I like the cliché “Buy the dips and sell the tips?” After all, the bottom of the market is a dip right? Wrong. The bottom of the market is the simply the bottom. So then what is a dip or tip? Well, in a rising market, a dip is a pullback from a previous high. Taking a look at a falling market, a tip is a pullback from a previous low. This brings me to my next cliché; buy low and sell high. If I am looking to put on a long position, wouldn’t it make sense to get a value entry? Of course it would. So I tell people, I look to buy on sale, or sell at value. I look for a suitable pullback then enter. Whether I’m right or wrong, I’m in a much better place and will hit my profit easier or minimize my loss. In either case, I’m better off.

The real question then is… where is the right place to buy or sell? This brings me to the next cliché; Support becomes resistance and resistance becomes support. That tells me everything I need to know. If you look at any symbol, you can often see that a previous top has now become a bottom while a previous bottom has become a top. Don’t believe me; look at your own charts. I have my charts set up in a way that gives me clear spots to test. And I have found that most of these spots are high probability entry points. In the event they are wrong, I find out right away and can cut my losses down to a minimum.

Finally, there’s one last cliché I think is vital to any trader; never trade with money you can’t afford to lose. Why is this so important? Well, after trading for six years now, I have come to understand that 90% of trading is the ability to manage your emotions. If this is true, then how do you think you will handle the market conditions when you are constantly in fear of losing your money? I wish someone would have explained this to me when I first started trading. I would have better prepared myself so that I had an edge. Instead, I traded when I wasn’t prepared and struggled for years because of this. Imagine if you had a nice steady income and your bills were all covered. If you had an account that had no bearing on your current finances, how do you think you would perform? Now imagine that your only income is from trading and you have limited resources other than what is currently in your trading account. Do you honestly feel you would perform the same as in the previous example? Not even close. I strongly encourage you to review your personal financial situation. If it’s not where it should be, you may want secure another income source to relieve you of the emotional burden when trading.

So, in closing, I suggest that you take some time to analyze your trading signal. If you find you’re violating any of these principles you may want to rethink your signal. Ask yourself… Am I a cliché trader? If not, you may want to become one soon.

Good Luck


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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