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Where To Now?

Fridays overnight action saw most world markets lift – even Greece was up.

This pop in prices presents a problem for traders since markets have been ordinary for some time. Lacklustre markets such as the ones we have been experiencing have been characterized by false breaks both up and down. These false breaks have the tendency to make traders gun shy and reluctant to take singals when they occur.  This results in traders moving from being process driven to outcome driven. Trading is a process dirven profession – that is the only thing we have control over is the process and application of our trading system as potential trades become manifest.  Outcome driven thinking pushes traders to think about the outcome of their trades based upon past experience. However, we have no control over the outcome since all outcomes are possible. The only thing we cotrol is the process of trading.

Unfortunately, in trading outcome directed thinking can be randomly reinforced. For example if your last trades had been losers and you decide to pass on the next valid signal and it too turns out to be a loser then your decision to do nothing has been rewarded. This can become an ingrained way of thinking very quickly since doing nothing causes you no pain.

It should be remembered that no market condition is permanent and that change is the only constant feature of markets. Markets neither go down forever nor do they go up forever.

Consider the two charts below. One os the narrow Dow Jones the other the much wider Russell 3000.

Irrespective of what you see in these two charts what you should see is a never ending stream of opportunities. Whether the breakout in the Dow is a false dawn or the start of a sustained run is largely an irrelevancy since this way of thinking is a function of outcome driven thinking rather than process driven thinking.

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