Many traders can't bring themselves to trade against the crowd. But if you stay true to your trading methods, you should have nothing to fear, says John C Burford.
I will continue with gold, as there is a tremendous battle now taking place between the bulls and the bears. It's producing some terrific swing trading opportunities, and some great examples of trader psychology.
On Monday, I was working a long trade from the $1,570 area. This trade was based on my assessment that the market had washed out enough weak longs in its headlong plunge to the $1,555-low last Thursday.
This wash out enabled the market to stage a relief rally, and with bullish consensus at a record low of 3% among futures professionals, I estimated a long trade was a low-risk one.
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This brings out a very important point for swing traders. Many traders would not touch the long side with a bargepole there. It was just too scary. The market was in freefall and we are all told not to bottom pick markets catching a falling knife'.
But with my methods of analysis, which I outlined on Monday, I was able to make a very good case for this contrarian trade. And it worked out very well, as it made my Fibonacci target at $1,620 yesterday right on the button!
That was a very nice 450-plus pips profit over three days.
(Click on image above for larger version)
I took as my high pivot point the most recent significant high at the $1,680 level, and when the $1,555-low was put in, I had my low pivot point.
If you examine the chart carefully, you will see that the first rally off the low was stopped right at the Fibonacci 23% level. This validates my use of these two pivot points for further targets.
You are your biggest adversary
But let's examine a very important point your psychology. Above all else, this will determine your fate as a trader!
For instance, a trader who is more cautious might be looking at doing this trade, but keep looking, wondering if they should do it or not. Their risk-averse attitude actually prevented them from seeing this trade as truly low-risk. How ironic!
And when the market did rally to the target, what would be their reaction, having missed out on this potential profit?
This question really gets to the heart of what makes a good trader, and what keeps many from achieving their goals. Such a nervous trader would perhaps kick themselffor having missed it. There it was on a plate and he/she missed it! Unforgivable, especially so if they had been stalking a gold trade for days or weeks.
This profit miss could destabilise that trader and they could give up trading in despair, or even throw caution to the winds and break every rule in the book on their next and probably last - trade.
I remember an incident many years ago when I found myself in a Las Vegas casino standing next to a guy who was in a bad losing streak, and was finally down to his last $100 bill. He was sweating profusely and what body language! He made his last throw of the dice and lost. I looked at his face as he walked away from the table, and it was very, very dark.
We do have the equivalent in the trading arena.
We cannot escape our emotions, but we can learn to use them as warning signals.
Be aware of your reactions to missed opportunities, to taking smaller profits than are available, to your losses. This is what really matters in trading at least as much your system.
A good trader will have rational reasons for entering and exiting a trade which are consistent with their methods.
Some will work fine, others not. That applies to all trading systems and methods.
The key to success lies within! Accept the fact that you made the best decision at the time and then move on, storing that experience in your memory bank.
You are not really doing battle with the markets the struggle lies within.
There's no single right answer
OK, let's zoom in on this rally on the 15-minute chart:
(Click on image above for larger version)
I have a tramline pair with a very secure lower line with numerous touch points. The upper one is very tentative, with only one touch point and minus a prior pivot point (PPP), plus the recent action.
Yesterday, the market broke below the lower line and then reversed sharply above to the upper line in a classic golden head fake.
Anyone trying a short trade there on the tramline break would have been whipsawed mightily. Therein lies the danger of trading gold! There really is nothing you can do in this situation except take your lumps and move on.
And this is yet another aspect of the psychological nature of trading. I had a target at $1,620 but it had not yet been reached. Do I keep my stop at break-even around $1,570 expecting the target to be hit and perhaps be disappointed or move it up just below the lower tramline to protect the profit already made?
Whatever decision is made, both have solid points in their favour. There is no single right answer. You make your decision and move on, safe in the knowledge that this trade will not be a loser and a profit is virtually assured. No regrets, no what ifs, no second guesses.
That is the most balanced attitude for any trader and balance of mind is what produces the results.
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:
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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