Pretty much every big success you can name owes his or her achievements to the ability to look past conventional wisdom. There was a time that Warren Buffett seemed irrelevant in the face of the dot-com boom, but he ignored the new CW and kept making big money in the process.
CW will lead you to average performance. It is the safe choice, but not necessarily the right choice.
So, to get you moving in the right direction, answer this: Will you be happy with average?
What does conventional wisdom look like for traders? Here are a few sayings you may have heard that serve as good examples:
(I am not commenting on their truth or value here, this is just a list. How many have you heard before?)
- Be fearful when others are greedy. Be greedy when others are fearful.
- Cut your losses.
- Let your profits run.
- Sell in May and go away.
- The mother of all evil is speculation.
- Bulls make money. Bears make money. Pigs? They get slaughtered.
- Novice Traders trade 5 to 10 times too big. They are taking 5 to 10% risks on a trade they should be taking 1 to 2 percent risks.
- Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
- Markets are never wrong – opinions often are.
- Live within your means, save as much as you can, avoid debt and speculative investments and keep a long-term investment perspective. Do this for a long time and you’ll minimize the chances of running out of money in retirement and having to move in with your kids.
- The stock market rewards patient investors and humbles speculators.
- The bull climbs the stairs and the bear jumps out the window.
- The public buys the most at the top and the least at the bottom.
- When all the experts and forecasts agree, something else is going to happen.
- Commandment #1: “Thou Shall Not Trade Against the Trend.”
- Sell when you can, not when you have to.
- Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.
- When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.
- Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.
- Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!
No doubt there is a lot of valuable wisdom here, and this list is by no means complete either.
The challenge for us traders is two-fold.
- We tend to pay lip service to valuable advice, without actually implementing it in our trading.
- Maybe, just maybe, the conventional approach is going to produce conventional, average results and we should be looking beyond that?How do we look beyond?
We challenge assumptions and test them for ourselves.
Let’s pick this one: Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.
And now lets challenge it.
Let’s consistently buy the bottom of the USDJPY and sell the tops from January to March this year, on the daily chart.
Here are our rules.
- Start trading from the second day of the month. If the first day of the month is bullish, we look to buy on the second day. We assume we’re buying the low. Vice versa if the first day is bearish.
- Trades are simply pending order breakouts, stops just behind the closest swing low/high.
- Hold your trade until you get a close in the opposite direction. Then if you are in profit, the entry price of the new reversal trade is your take profit on the profitable trade. (The chart should make this clearer)
- If you get a reversal setup and you aren’t in profit, hedge until price breaks.
Here is a visual key to guide you:
And here are the trades:
Conventional wisdom says that you can’t consistently pick tops and bottoms, but that is exactly what we have just done. We just picked 3 tops and 3 bottoms and we made money. What conventional wisdom is trying to say is that you can’t pick tops and bottoms without having losing trades. And what have we proved here? We’ve proved that it didn’t matter when we took hits because we still came out on top.
So, if you are afraid of losing, you can’t pick tops and bottoms. If you know that losing trades are just a part of the game and your system has a positive expectancy, what are you waiting for? I’ve picked three months (at random) and I didn’t do more simply because space and legibility does not allow it.
This is by no means a complete test showing that this approach will lead to positive results in the long run (although if you decide to trade Flow with me, you’ll be surprised how simple it can be.) But it is an example of conventional wisdom challenged.
Article by Glen Howell