Last Wednesday, I watched an interesting programme on TV – and I don’t often say that. It was an investigation into the placebo effect. I have long been interested in this effect and how a sugar pill can often produce better health outcomes than a supposed wonder drug. I suppose it appeals to my contrary nature.
Most placebo experiments have centred on the test patients and the doctors not knowing which pill was which – the classic double-blind study. But in the experiment on the programme I watched, both patients and doctors knew in advance which pill they were using – drug or sugar (actually, it is usually corn starch). And the amazing result was that patients still did better with the placebo.
You’re probably wondering what this has to do with trading. Just about everything, as it happens. Although it appears perverse that a harmless inert pill can work wonders, it is not so strange when you consider the important role our attitudes plays in shaping our lives. If you and the doctor truly believe the placebo will work, chances are it will.
In the trading arena, pessimism will lead you to expect your performance to be sub-par, even if you are not conscious of it. If you are an optimist, you will expect the opposite.
Don’t be your own worst enemy
Sigmund Freud was one of the first to recognise that we are all influenced by subconscious drives that we may or may not be aware of. So, if our subconscious drives are forcing us to find trading success elusive, is there anything we can do?
There are many ways a trader can sabotage their trading. Here are some:
1. Taking profits too soon and holding losers too long.
2. Seeing a great entry and not taking it, fearing the worst.
3. Trading too large positions (over-confidence).
4. Not using protective stops (over-confidence).
These traits are difficult to correct without some aids to discipline. That is why I have incorporated easy-to-follow rules in my tramline trading method.
B. Using resting stop-entry orders can help with 2.
C. My 3% rule helps you work out the maximum size bets for 3.
D. The most vital habit is entering your stop at the same time as your trade entry.
Whether these are placebos or not, they do work.
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Was I right about gold?
On Monday, gold was approaching the yawning gap on the daily chart from last October. Here is Monday’s chart:
This is what I wrote: “There is a very large open gap from November, which was when the market broke suddenly. I have written about gaps previously and the one takeaway from a study of gaps is that most of them eventually get filled.
“Gaps act like magnets on a rod of iron. They attract the market back to it and when it gets close it suddenly reverses polarity, thereby repelling the market.
“My best guess this morning is that the market will close (or partially close) the gap, then suffer a dip before moving on towards my targets.”
So let’s find out how my guess is working out:
The market has moved inside the gap to the $1,230 level and is currently backing off, as I expected. Also, note that the rally has carried to the important Fibonacci 23% retrace of the wave down off the October high around $1,800. This is a natural place to at least see a slowdown in the rally.
This means I have two valid reasons to suspect a decent pause in the rally.
How do I play the pause?
If the rally has in fact paused, I now need to know how to play it. If I was long from near the $1,200 level, a prudent course would be to take at least partial profits near current levels. That would give me a tidy $100-plus profit. I would then hold the other part and raise the protect-profit stop.
If I was without a position and bullish, it would probably be best to wait for a dip to enter the gold market.
We have seen a rally, but it is tiny in comparison to the slide since October. And this rally seems to me to be either an A wave up or wave 1 of a five-wave pattern. Either way, the next move should be a small wave down.• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
• The essentials of tramline trading
• Advanced tramline trading
• An introduction to Elliott wave theory
• Advanced trading with Elliott waves
• Trading with Fibonacci levels
• Trading with 'momentum'
• Putting it all together
• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.
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