Trading is simple – but not easy!
ANNOUNCEMENT
I shall be running a Free Trial offer to my exclusive VIP TRADERS CLUB in January. I gave members some terrific trades in 2016 and have just taken massive profits on some. Do look out for further updates.
_______________
As an early Christmas present to my readers I thought I would reveal the true secret to success in trading. In fact, there is one Golden Rule you need to follow. Here it is:
BUY WHEN EVERYONE HATES IT AND SELL WHEN EVERYONE LOVES IT (and vice versa for shorting).
That’s it. Of course, you need to use strict money management rules (I use only two very simple ones) – and timing is a crucial factor (that is why I developed my Tramline Trading method).
I maintain that trading the public financial markets is exceedingly simple to understand – but very difficult to execute in practice, especially for newcomers. That is so because the majority of UK spread betters lose money – and I am willing to bet that very many longer-term investors perform likewise.
If it is simple as buy when everyone hates it ( a version of the Buy Low, Sell High rule), why do so many traders lose?
It comes down to human psychology – and our own weaknesses. As social creatures, we love to belong to a group – standing out and exposed alone against the crowd is a fearful act for many. It is so much more comforting to go along with the majority. And if they are being lead by a charismatic guru/pundit, that is icing on the cake.
One other very practical reason many traders fail is that most traders are not full-time students of the markets and are only exposed to MSM headlines for their news and opinions. And one thing the MSM is very good at is this: they can create garish and emotional headlines when a market has made a big move – but only after the trend has been established. Most people believe what they read.
But imagine reading this headline in the WSJ: ‘Gold just hit a multi-month low at $1125 on a Fibonacci support level at a wave 5 low – and is a fabulous buy!’.
Of course, that will never happen – instead, the article will explain why gold is out of favour using totally logical explanations such as booming stock market a better bet, or mine production at record highs, or US interest rates on the rise. It will then forecast a plunge to below $1,000.
That is conventional reporting and forecasting (and usually totally wrong ) – but when many of these articles appear, they are of major usefulness to me as wonderful contrary indicators (see below).
Remember last summer when the US dollar was the most despised currency on earth? The Fed had forced short term rates down to the floor and talk was of it going negative, as had several other central banks. Bond yields were at record lows and most of Japan’s debt in negative territory. The MSM headline writers had a field day with their bearish projections.
But disciplined traders did not get sucked in. We know that when the majority are convinced something would happen, it wouldn’t. That is when I started looking at buying the dollar (having ridden a nice bear trade earlier). Here is the daily chart
The dollar bottomed in May – two months before the top tick in Treasuries and gave advance warning that T-Bonds were about to turn. Naturally, for the summer months and into autumn, the pundits were flummoxed (as usual) to explain the dollar’s rise. Yet rise it did.
The big break came in October when it rallied in a strong push from the 95 area to the 99 level as traders realised that the euro was in big trouble and US interest rates would not go negative after all. The collapse to the apex of the huge wedge was a textbook test of the bull market and when Trump was victorious in early November, dollar buying went berserk. Dollar liquidity tightened especially overseas (most global sovereign debt is denominated in dollars).
Last May, the dollar was universally hated – the time to buy. Now the dollar is loved by everybody – the time to sell? Our trade around the 94 area and exited around the 103 level has resulted in a superb profit – in fact, a whale trade. You really don’t need many of these a year to build your account substantially.
Here is the history of the DSI sentiment index
chart courtesy www.elliottwave.com
Right at the summer low, bulls numbered less than 20% which is quite high compared with the previous low readings at 9%. Note that at each of these DSI lows, the dollar staged good rallies. But now the picture has switched around – bulls outnumber bears by a massive 24 to 1. That’s as extreme a reading as I have ever seen.
My forecast? The Dollar is about to correct.
And this scenario keeps coming around. Right now, US Treasuries are among the most hated – and therefore due a recovery. In fact, with gold and silver just as despised, the landscape is littered with markets that possess extreme sentiment levels. This is ideal hunting ground for contrarians.
Is the Dow rocket about to fall into a lower orbit?
You are familiar with my HI Headline Indicator I am sure. It is a variant of the well-known Magazine Cover Indicator. In the past, the covers of major financial magazines such as The Economist and Barron’s have been wonderful indicators for taking contrary positions from that indicated by the cover. The more strident and certain the headline, the more certain you can be of a top/bottom is nigh.
And here is Barron’s latest:
Yes folks, the US investor public is gearing up for that 20,000 party – they have ordered the food and drinks already. Note the sub-head: ‘The Trump rally should push the Dow past 20,000 any day now. Here’s why stocks look solid and there should be more gains ahead in 2017’
Of course, not every such cover signals a major turn – it is not an infallible indicator. But we have been in a major bull market since 2009 (nearly eight years) with the Dow gaining 2,500 Trumpian points (14%) in a little over a month. The rally is very long in the tooth. And only recently have mom & pop investors been drawn back into the market with the pros and the Big Switch out of bonds into shares is in full swing. Sentiment is suddenly very bullish following years of so-so sentiment. That is when tops are usually made.
This latest rally has been inspired by the Trump effect but ominously, interest rates are now turning up to provide a headwind.
Yes stocks can continue heading north into 2017 and beyond, but is that likely? If (and that is a big ‘if’) Trump is able to convince Congress to enact the tax cuts and spending plans he has announced, the National Debt will balloon even further out of sight and investors will demand higher yields. All of a sudden, share dividends won’t look quite so good against a sure-thing Treasury yield of 5% or higher.
A much more likely scenario is that the Dow will topple over in a large fourth wave to relieve the overly bullish sentiment and then stage a recovery. I am not sure of the timing but that is the scenario I am working with.
VIP Traders Club members were long the Dow just after the Trump victory, and have taken major profits this week.
______________
Wishing all my readers a very Happy Christmas!
