Adjusting to the Flow

  • Posted by
  • on May 3rd, 2011

I’ve been thinking about this lately, and enjoyed seeing a favorite trader/blogger write on the subject today.  Peter Brandt shared a fantastic post on the differing mindset for writing vs. trading, and I thought I’d add my 2 cents.  My favorite line was repeated a few times as follows:

“A position is not an opinion and an opinion is not a position.”

This couldn’t be more true, with today being a perfect example of the difference.  My last post highlighted what I thought was an overwhelming shift out of midcap winners and into megacap laggards.  I noted at the end of the piece that I was long $DIA & short $IWM.  I feel the exact same way I did then, but there is no way I’d enter the same trade today.  I like the confirmation of seeing $IWM move from 1 ATR above its 3 day VWAP to nearly 2 ATR below, but shorting it is NOT the same trade here.

It’s not that I don’t believe the shift is still underway, it’s just that prices have changed a ton in 2 days.  Someone with a much longer timeframe might still want to exploit the idea, but on a swing basis the trade is tired and needs to be reset.  A daytrader could get his/her face ripped off following this idea, as the climate has shifted from a positive feedback loop(momentum) into a negative feedback loop(mean reversion) since the “Bin Laden rally” fizzled Monday morning.  To now buy the winners of the past few days and short the losers is an AWFUL idea, in my opinion.  A market with 80% of stocks above their 10 day MA is a different animal than one at 40% and must be treated as such.

Knowing one’s timeframe is most important, and knowing whether one’s timeframe is in a “Fade” or “Follow” phase is right there with it.  Copying Peter again, “I believe that the payoff in trading comes from the risk control protocols, not from trade selection.” Agree 100%.  Put someone’s idea through my filter?  Yes, indeed…the extra eyes can be a killer asset when I find time to watch the Stock Twits stream.  But randomly joining an idea that was hatched under different circumstances, by a different brain with a different way of perceiving risk?  Not for me, and I hope not for anyone that reads my ramblings.

Bottom line…I’m still believer in the long mega/short mid theme, but the trade would now be almost the opposite, at least for a couple days.  The leaders are still sucking wind, but it’s a little obvious by now and the next move is probably a dead cat bounce by the momo stocks at the expense of the big dogs I’ve been praising.  I still have my position, but the ratio has changed and strike prices rolled as dictated by the action.  Developing an idea is a static act done once; managing it is a dynamic process requiring constant evaluation of risk and reward.


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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