| Posted in THE GATEWAY TO SHORT-TERM TRADING | Posted on
Swing traders must compete against the best-informed crowd in history. Financial institutions spent decades building expensive barriers to keep their middlemen in the seat of power. The Net revolution collapsed this unfortunate scheme and opened the markets to the average investor. Now anyone with a computer can access breaking news, execute a low-commission trade, and witness the immediate result. Technical analysis has come to the masses as well. The Web ensures that everyone knows their highs from their lows and can identify popular patterns as soon as they appear on their favorite stock charts. Managing information and finding opportunity grow more difficult each day. Common knowledge of any market condition closes the system inefficiency that allows easy profit. But the masses respond slowly and continue to throw money at losing strategies for some time. Swing traders succeed when they recognize changing conditions and stay one step ahead of this restless crowd. This simple task requires great discipline because they must constantly abandon winning strategies and trade fresh ones as soon as the herd charges in their direction. The markets have grown enormously complex over the past century. Look back at Charles Dow’s revelations on trend and reversal in The Wall Street Journal or read the fascinating accounts of Roaring 20s trader Jesse Livermore in Edwin LeFevre’s Reminiscences of a Stock Operator. The middlemen of that day pocketed such a large piece of the trading action that only the well-greased elite could profit from most market fluctuations. Imagine a world with no electronic communications networks, derivatives markets, or talking heads. Yet the core elements of swing trading and technical analysis have not changed in decades. Stocks still go up or down with many pullbacks to test support and resistance. New highs continue to generate greed that carries price well past most rational expectations. And modern traders face the same emotional crowd that Livermore did when he played the bucket shops early in the last century. Today’s aspirants often confuse execution with opportunity. Rapid placement tools and fast connections promise a level playing field for any individual interested in the markets. Add some high-tech software, and the home office may even rival a glass tower financial house. But these complex systems can short circuit the most critical requirement for consistent profits: market timing that relies on accuracy rather than speed. And the tremendous ease of execution generates instant karma for errors and washes out traders at the fastest rate in history. When new players first enter this fascinating world, they run quickly to bookshelves and absorb the trading masters. But Murphy, Elder, and Schwager reveal an organism that can only be digested in small bits and pieces. Neophytes must move slowly and protect capital until experience finally awakens knowledge. Over time, trade rewards and tragedies condition the mind to develop the instincts needed for long-term survival. Only then will the journeyman trader finally discover what works and what doesn’t in this challenging game. Seasoned traders often carry a flawed and incomplete market reality as well. They limit execution to a few classic setups rather than build understanding of the entire complex mechanism. When the market fails to offer perfect conditions for their limited strategies, tactics demand that they stand aside and wait. But if they lack strong discipline, the restless mind fills in the missing pieces and encourages bad positions. These narrow tactics may end careers in other ways. If the masses discover their well-worn game, it could stop working completely and leave them with no source of income. The daily demands of trading are so intense that many borderline participants just grow lazy and evolve a self-destructive style. Fatigue sets in as the mind struggles to organize this complex world and many valuable shades of gray resolve into black and white illusion. In this dangerous view, stock positions become all-or-nothing events and wish fulfillment distorts vital incoming signals. As hope replaces good judgment, another market loser washes out and looks for a safer hobby. Trading at all skill levels evokes emotions that generate great illusions. Sudden gains convince us that we are invulnerable, while painful losses confirm our ugly imperfection. We then externalize and turn to others who will comfort us as they parrot our point of view. Or we try to blame external systems for our failure. After all, everyone knows that market makers steal our money through evil tactics while bad connections and buggy software keep us from reaping fortunes. The path to modern trading power must allow participants to adapt quickly
