0 Will the Market Rally on Spending?
My conversations over the weekend included a lot of “What do you think the market will do with the new spending by Congress?” Trader A thinks that Washington is looting the treasury in a fashion to make post-Katrina New Orleans blush. As such, he believes the market will drop – so he’s short. Trader B has decided that Congress has a duty to prop the economy and the $800 billion is the right medicine. Therefore, she thinks the market will rally on news of the bill passage and signing. She bought the index ETFs.
From a technical perspective, Trader A and Trader B are making the same crucial mistake. They’re attempting to predict market direction based on their rationale of what the market should do. As we’ve said many times, our opinions are not important. The successful trader doesn’t try to predict the market. Rather, he does his best to read the market. He looks to see where money is flowing; not where he thinks it should flow. Take a moment to recognize the profound differences between the two approaches to the market.
If you want to take a portion of your account and bet on market direction without having technical data to back it up, that’s fine. But don’t do it under the guise of trading. Recognize that you’re engaging in speculation and deal with the transaction accordingly. You still need to decide in advance how much you’re willing to lose and at what point you close the position with a loss. Don’t hold so tenaciously to your opinion that you cloud your better judgment about managing your risk.
Develop an opinion on economic policy and make your own moral decisions. That’s your right and duty as a citizen. But as a trader, your objective is to profit from following the money. Sometimes the market zigs when you think it should zag. Follow the market.
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