In 15 years of trading for a living, I've never made a penny thinking I was smarter than the market.
That's why when I get emails telling me, say, crude oil "shouldn't" be ramping or gold is about to collapse or stocks are going to roll over, I tend to click on the next note. It's not that I don't respect the concept of macro fundamentals -- it's that any experienced trader knows price is the final arbiter of wisdom. You can't spend "shoulda" at the grocery store, and you can't pay for your kid's braces with what "coulda" been. Paying the bills trading means you have to make, and book, a profit. Everything else is just noise.
To paraphrase Bull Durham, "don't think, Meat, trade."
That's why when I find myself trying to handicap the outcome of our latest war for democracy in the Middle East, the Japanese tsunami or how the U.S. Fed is propping up stocks, I take a step back and get out of my own head by using charts. That's right, good old fashioned, much maligned, price graphs of the asset in question.
The process is intentionally as simple as I can make it. I use a ruler and take either a fat-tipped pen or, yes, a purple crayon, line up the lowest ticks over a reasonable time frame (at least 6 months, preferably longer) and draw a line. I'm looking for a trendline that maximizes the number of "touches" along the trend, the more touches, the better defined the trend.
Simple? Completely. A comprehensive investment strategy? No way. Effective? Abso-freaking-lutely. Broken trendlines got me out of stocks in 2008, got me back in stocks in the spring of 2009 and have kept me in gold via the SPDR Gold Shares (GLD) despite my disdain for the fundamental gold thesis. If you told me you were going to use one of those "neuralizers" from Men in Black, and said I could either keep the ability to draw charts or the stuff I learned in business school, I'd keep the graphs.
Charts take out the emotion. A chart doesn't pass judgment or make fun of you. A chart just tells you when the trend has turned against your position. Never fighting the trend is the first thing you learn in trader school. Someday gold's trend will turn lower. When it does, I'll sell.
It doesn't matter if you're talking about a relationship, a fist fight or a trade. You can attempt anything you want as long as you have an exit plan. When I'm playing momentum my exit plan never changes -- when the trend changes, I sell.
In an uncertain world, the old reliable purple crayon method is a security blanket, a hug from mom and warm cocoa all wrapped into one line and a ruler. That makes following my purple crayon strategy the best value on Wall Street.
Disclosures: Macke is long GLD.
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- SPDR Gold Shares
- crude oil
- democracy in the Middle East