Let Us Jump In For A Second

| fractalerts | Blog

Last week, we only released alerts on a few markets. For the others, we thought it was best to just stay silent and let the markets do what they were going to do (unemotional and systematic). Yesterday, we received more than fifty emails from subscribers asking questions, sharing opinions and offering congratulatory high fives (we loved every one of them).

After responding multiple times with things like “let’s remain unemotional,” “don’t get too excited,” and “stop watching the screen”, we thought it might be best to put our thoughts into a blog. This is our chance to answer all of your emails en masse, but also explain some of the rationale behind our approach to trading. It also gives us a chance to weigh in with a bizarre analogy, but more on that later.

Those of you who have been with us for a long time have read emails like this from us a number of times. We’ll quote ourselves from March of this year:

“We don't like to brag about trading profits. In fact, we have rules against it. After all, how can we remain unemotional about trading if we are patting ourselves on the back for the good trades or scolding ourselves for the bad ones. In order to remain unemotional and allow a system to work, we have to welcome the wins and accept the losses... evenly”

We definitely do not want to dampen anyone’s enthusiasm. Trading is supposed to be fun and something you wake up anxious to participate in every day. However, beating our chest on good days leads to shameful head scratching on bad ones… and that’s something that we at fractal HQ try to avoid.

Bungee cords and the financial markets 101.

Sometimes it’s best to explain our approach with a ridiculous analogy

Bungee cords… what do they have in common with the financial markets? Ideally, neither of them moves in a straight line. #sarcasm

Yesterday in the S&P would be a perfect example.

  • Beginning at 1970
  • Down to 1910
  • Up to 1942
  • Limit down of 1870 and further to 1831 once the limit was released.
  • Up to 1950 #headscratcher
  • Down to 1876
  • Up to 1920
  • And finally down to 1871 and settlement.

That range alone exceeded the point range of every week over the last seven years with the exception of the fall of 2008, May 2010 and August 2011. Most importantly, however none of those markets moved in a straight line.

Bungee cords and markets both have the potential to get you hung up in a very uncomfortable position if you try to fight the pattern.

We heard from multiple day traders on Monday who closed positions and then anxiously tried to get back into the market on the short side… only to find themselves chasing or getting stopped over and over again. This was the case not only in the indices but in Silver which moved 0.50 in thirty minutes, or Corn that moved 4.5% in two hours, or Yen that sold more than 3% in ten minutes. The pattern of a bungee cord is “gravity always wins.” Try to fight that and you may find yourself with one arm above your head and a leg in a position you may never recover from. Try to fight the markets when they’re moving aggressively, you may be looking for a new place to live (actually we’re not sure which one is worse).

Both a bungee jumper and the financial markets will find an area to settle after all of the up and down action is done.

Just like with bungee cords and gravity, eventually markets settle. The ride can be aggressive, erratic and hair-raising but eventually all of that comes to an end and everyone gets to take a breath. The key with trading, as with taking a bungee jump, is to enjoy the ride and patiently wait for the settlement… then have a beer.

Both are best enjoyed with a partner… someone who’s happy to tell you “you’re doing it wrong.”

Our blog two weeks ago talked about “don’t trade in a closet”. The gist was that you should find someone to talk to about ideas or your plans. If that’s us, great. We’re happy to be a sounding board or offer ideas or suggestions. But just as you would never go bungee jumping by yourself (how on earth would you even get down?!), trading alone can be just as disastrous. Our alerts provide that second voice but a conversation requires two ways of communication… so let us hear from you often.

Let’s not get all emotional

Days, like the one we saw yesterday, don’t happen all the time. But when they do people get emotionally involved. It’s hard not to, we get that. Money is being lost, money is being made; both sides of the trade get the heart-rate going.

But things will calm down. They always do. Like that bungee cord, the markets will run out of momentum eventually. People will go about their day and get distracted by other things in the news… we may have found a “star destroyer” on Mars.

It is because of this that we sit back and let the system take over. At fractalerts we trade systematically and unemotionally. When all others were knee-jerk reacting to the drop in the market, we were watching impassively, as if we had no money invested (which is not the case, we make the same trades that we suggest you do). When the rolling news was talking about unprecedented drops, we changed the channel.

Emotions can make you do silly things (bungee jump for example…). They can make you second guess a system which out performs the market year on year. They can also contribute to you making mistakes, miscalculating risk and ultimately losing millions. Sure, sometimes you luck out and cash out above the curve, but isn’t it better to stick with a system which means that over the course of the year you finish higher instead of just making money on a few lucky trades?!

Don’t confuse unemotional and systemic with boring though. We love the excitement of the markets, and we know you do too. None of us would be doing this if it was dull. But if we know anything, and our historical data suggests we do, the next few weeks are going to be interesting. So our only advice is to stick with us, stay calm and we’ll ride this one out together…