Breakouts

There has been much chatter on our mentor forum  lately regarding the breakout in the price of gold. I have mentioned several times that I had been long gold and short equity indices via our advisory service. I am now neutral with only one remaining short position in the market which is a carry over EU50 trade which is yet to be stopped out on the high side.

The chatter about gold intrigued me because several of the old heads had missed the trade completely.

There was a clear break to the upside and if you put this break into the context of the financial paranoia that had been rampant you could see why it occurred. Unfortunately, the world never actually ends when everyone says it will.

But the failure to take this break was interesting. Upon reflection I can see a few reasons why this happened.

1. Some didn’t actually see it because gold is not in their portfolio of  instruments. This should probably be reviewed since gold is a cornerstone commodity and is prone to these big emotion filled moves.

2. Some were overwhelmed by a lot of the noise in the market – we had moves of 5% daily in the market. I know the size of these moves destabilised many traders and rattled them. This is why we have a plan and we leave the tv off. Emotional cheerleading is the preserve of the peanuts who appear on the business channels.

3. Traders find it often nigh on impossible to buy new highs – there is a profound resistance to buying something as it moves to a new high. This resistance is strengthened by the ability to see how far an instrument has risen in price. A raft of behaviours kick in rationalising why it cannot go any higher and why the trader should have bought it at a much lower level. The problem is it was bought at a much lower level and now you do have a chance to buy it.

However, we have built in a series of cultural notions of how much something is worth. We often believe that we have an intrinsic sense of how much something should be worth – notice this is not how much it is actually worth but how much it should be worth. Traders believe that they know how much something should be worth and if it is higher than this subconscious notion then the trade is not taken.

Whatever the reason for missing such a trade it no doubt brings with it a degree of emotional pain but as I said to one trader all of us have trades that got away. The trick is to accept the pain that these mistakes bring with them. Too often people want to heal themselves (insert sarcastic tone here……what a wanking term. I had better give Dr Phil a call) Pain is a good motivator – traders should feel pain for screwing up, it will help stop you from doing it again.

As an addendum it is also worth mentioning that traders often dont trust simple things such as a move to an all time high. Or the breach of a simple straight line.

Consider the chart below of the $A – on this chart I simply plotted moves to new significant highs in an existing uptrend. There are five trades, four of them profitable. You will notice the chart is not covered with lines or magic tools. It is a series of simple straight lines. But these straight lines represent moves to new highs and breaks of congestion. These moves are telling you something – it is simply a matter of listening to them.