February 9, 2018
I will start this blog by saying that there are many highly talented, very experienced, cordial traders and investors on Twitter who share a great amount of wisdom, lessons and valuable experiences daily. Over the last five years I have developed an acquaintance and friendship with many of them, have enjoyed our exchanges, have learned alot of valuable information along the way, and hope to have shared some as well. With that being said, the overwhelming amount of commentary, data and conflicting information, often based on various time frames, strategies and objectives, can be very confusing and sometimes costly for many.
The last 6 weeks in the stock markets have had a considerable jump in shorter term volatility. Since January 1, the S & P 500 (SPX) has had a +6% move in four weeks, followed by -11% in ten sessions, followed by +8% in 6 sessions. The Volatility Index (VIX) had a record +177% spike in two days , February 5 and 6.
Heightened volatility is often caused by increased trader and investor emotions, and no where has that been more evident than on social media, primarily “Financial Twitter”, or FinTwit as we like to call it. Having been an active member of FinTwit for over five years now, I have found it to be an extremely beneficial networking platform, I have learned alot and have made many countless new friendships and acquaintances. Like any medium, it also has it’s drawbacks and pitfalls that can be very detrimental to one’s trading capital.
One of FinTwit’s greatest benefits is also one of its greatest drawbacks. There are a variety of talented, experienced traders who share their viewpoints and strategies from time to time. There are also countless blogs, media sources, and Wall Street firms with reports and opinions on social media. At times, it is difficult to separate it all.
The issue is with so many conflicting comments and views from so many different sources, how does one process it all, or maybe more importantly, tune it all out?
Over the last few weeks, here is an idea of the types of commentary that we have all seen, from no one in particular, whether it be individual, media outlet or Wall Street firm:
- These markets are abnormal
- These markets are perfectly normal
- New lows are coming
- New highs are coming
- This correction is healthy
- This correction is the start of a new bear market and a new leg down
- On the day of the 2532 (200day sma) short term low, some were 80-100% cash
- On the day of the 2532 low some were buying
- Some have said sit out and don’t do anything until markets “settle down”
- Some have said to go all in
- Some have said to scale some in and keep some cash
- Some say there “has to be a retest” of the SPX 200 day moving average or 2532 low
- Some say the Futures market (ES) already retested the low because it tested the 200d MA on 2/5 and 2/9.
- Some say to sell this rally
- Some say to buy this pullback
- Some Wall Street firms have reportedly said both things to different sets of clients
With an overwhelming about of consistently different opinions, how does a trader/investor process it all, filter it all, or tune it all out. Here are a few of my best ideas:
1. Do Not Blindly Follow Anyone’s Commentary
It does not matter how many Followers someone has on social media, how long they have been trading, how much money they manage, how many TV shows they are on, or how big of a Wall Street firm or media outlet they are – they can get it wrong. Also, some in the media use market calls as a marketing tactic – make a big call, get it “right”, claim Guru status. Get it wrong, sweep it under the rug and people will forget. There is also no assurance that if that source changes direction mid way that they will update it, or that you will see it.
2. Understand That Everyone Has Different Time Frames, Methods and Objective
If you have two accounts, a shorter term swing trading style account and a longer term, bigger money position trading account, you likely manage them differently and make decisions based on different factors. Many on social media are managing accounts based on different time frames and objectives than yours, so to follow their moves is not productive. Managing longer term positions using shorter term data does not make sense , and the opposite may not as well. Someone in 100% cash or 130% long may be trading a very short term strategy that they have years of experience with and may have the ability to turn it all on a dime. Everyone has different experience and skill levels.
Some use options, some don’t. Some sell short, so don’t. Some trade short term, some don’t. Some leverage trades or positions, some don’t. The key point is just because someone says it on Twitter or TV, doesn’t mean that you need to, or that it works for them or will work for you. More activity and more complication usually leads to more losses. Some people can drive 150mph for a living, for most of us, it is a bad idea.
Focus on getting very proficient at one method or style of trading that suits your personality and mindset and don’t try to do something because someone else does it. Often, less is usually more.
3. Be Wary of Big All or Nothing Decisions
If you are managing longer term money, going 80- 100% cash at any time, or 130% long can be a dicey proposition. Some were “all cash” at the reversal lows before SPX had its best one week gain since 2013. Some were wildly over leveraged at the recent high and the drawdown hit their accounts much harder due to the leverage. The problem with big all or nothing calls with your serious money, is if you were all out at 2532, how do you then buy back in at 2632 or 2732? Some are still waiting for the 2009 and 2015 lows to retest to “buy back in”. Maybe you do buy back in and then markets go back down to new lows and the whipsaw cycle of reversals and losses starts again. If 130% long at the recent high, not only is the drawdown accelerated, but there are no funds available to take lower entry points.
Every day is a good day to focus on risk management and risk exposure. I started to get defensive on January 24, two days before the recent short term high, when I posted 10 Steps to be Ready for the Next Market Pullback on Twitter and did a special extended blog and 30 minute members only video that day for Members of my website to discuss defensive strategies including raising cash , raising stops, rotating out of shorter term positions and scaling “second tier” names out of accounts. I did not go to “all cash” or anything drastic, I had stops hit in my accounts, both trailing profit stops and outright stop losses, but everything was within balance, and I had a significant amount of cash to put to work in some of the stronger names on my screen when SPX successfully tested it’s 200day moving average that Friday, which is my core long term trend signal. Once again, not all in, I wasn’t trying to “catch the bottom”, I just followed the process that I have trained myself on for the past 11 years. Some new positions with stops and some cash on the side. Moderation within the overall plan.
I have found a significantly better and less emotional approach is the scale in and scale out approach. Moderation often produces better results and less emotional stress. I currently have some open positions, pre defined exits, higher than average cash levels (26%), and a narrow watch list of very strong, leading names that I am monitoring for a price entry signal which may or may not trigger. I participated in some down side and drawdown, but far from all of it. I also fully participated in the recovery and now I am cautiously picking my spots as they arise. I have positions that are doing quite well, I have stops and exits in place if they unwind and I have cash to cushion the volatility and to take advantage of any opportunities.
4. Do Not Let “Fear of Missing Out” Or “Fear of Minor Drawdowns” Cloud Your Trading
Traders often act emotionally and chase stocks well past their technical buy signal for fear of the stock going higher without them. You need to train your mind that this is going to happen constantly and that you don’t need to be in every move, there are others coming tomorrow. On any given day, 2,000 or 3,000 stocks may close the day higher, you can’t be in every one and you don’t need to be. Based on account size, 3 to 20 positions managed correctly can be very profitable.
Another mistake is to not take a technically correctly signaled position, due to fear of it pulling back, the market pulling back or not getting a lower price. I’ve heard stories of people missing triple digit stock moves because they had a limit order in “just below the market” that never filled or that TV a pundit said the market had to pullback so they did nothing and watched the stock rise triple digits without them.
If you are taking an intermediate to longer term position, and you have a correctly sized trade with a stop loss, then your money management allows you to take the trade and the stop will give it room to work. I have had trades start in the red for weeks and then become triple digit winners because I set a properly placed risk adjusted stop and let the trade go to work. You are not going to catch the very bottom consistently, some trades will move lower, some will have drawdowns and some will get stopped out. If you are playing for the exact lows, that will cost you significantly more in missed trades than it will save you over time.
5. Develop Your Own Price Based, Technical Process so that You No Longer Seek Third Party Opinions
After 21 years of trading and 42 years connected to the industry by family, I can unequivocally say that no one can consistently predict market moves over time. There are no infallible Gurus. Recently a very well established and highly respected multi-Billionaire Hedge Fund manager stated that anyone with cash was going to “feel stupid”, just before one of the biggest ten day market drawdowns in history. There are no Gurus and there are no refund checks for acting on anyone else’s commentary.
The financial media is there to entertain and possibly inform, but not to make anyone a better trader or investor. They have to fill up 14 hours or more a day with things to keep viewers tuned in. I have not watched one Financial media outlet for maybe a decade and I keep the other one on the TV all day with the sound muted most of the time, just so I can track key market price levels and stay up to date of financial news. I do not trade $1 based off anything that I see on TV, or read online.
I came to the conclusion over a decade ago that the only consistent truth was the price on the chart, and after having tried every Guru, newsletter and “hot”‘ trading style that the key to my personal long term longevity and success was to develop some type of effective trading process based off price and technicals, avoid my own emotions and predictions, and literally everyone else’s. I have found price and technicals to be much more reliable than emotion and prediction and significantly more profitable. It took alot of time, effort, perseverance and patience on my part along with alot of developmental trading losses along the way. I was also fortunate to find a few experienced mentors to help me develop.
It was not easy, but nothing of any great benefit usually is. My trading results and profits have increased significantly and just as important my mental stress has diminished remarkably as I am no longer searching for the next great Guru, prediction or market call. I just follow my own price based technical process and manage it daily.
There are many good educational trading resources on FinTwit as well, but my best suggestion is to find some that are in line with your mindset, try to learn the psychology, process and math behind trading correctly and not just look for Gurus, predictions and calls.
Social Media, when used correctly, can be a very valuable and developmental tool, a well as a great networking platform for many, and can help to turn many into much better traders and investors. The key is to be able to find those who objectives, time frames and mindset is in line with yours, and focus more on learning the actual process not so much on predictions and market calls.