The Power of Observation

Many moons ago while watching Pete Steidlmayer trade at his Market Profile boot camp, I was struck by Pete’s observation of price action nuances. What appeared to be the same pattern would mean different things under different contexts. And when I asked Pete about it, I’d get an answer that amounted to: “You’ll know when you see it” (!!).

Nowadays, I know what he means. While the essence of technical trading is pattern recognition, it’s the context in which the patterns appear that delivers the hidden messages of the market.

Take the AUDUSD.  In the Blog ‘The Frank Tubbs Model” I made the case for a preferred target for the AUDUSD at around .9567 to .9739. But on July 27, I exited 2/3 of my long positions at .9022. The reasons for my action lay in my observations that:

1. the AUDUSD and S&P have been directly correlated in recent times and
2. there was a high probability the S&P had made a temporary top at around 1118.87 (basis Sept) and could head back down to 1000.
3. if that did occur then we’d see the AUDUSD back to .8067 to .8100; if that occurred my trailing stop below .89 would be hit.
4. accordingly I decided to exit 2/3 of the longs.

No matter how the trade turns out, the early exit was the direct result of the observation that the AUDUSD direction was for the moment directly related to the direction of the S&P. If we see the AUDUSD power to the .95 target, it will probably mean that we’ll also be seeing the S&P move above 1129.50 (basis Sept). In short, the exit would be ‘incorrect’ because of an error in judgment rather than an error of observation.

I believe that as discretionary trader, I need to remain open to all information the market provides. Doing so will strengthen my decision-making skills and the long run this improvement will have a positive impact on my bottom line. The reverse is also true: if we chose to deny information because the info goes against our preconceived ideas, then in the long-run we’ll be worse off.

cognitive bias I read somewhere that once you have a bias that's firmly rooted it takes twice as much information against that bias to get you to consider you may be wrong. I never plant my flag in the bull/bear camp. The opportunity cost is far too high. Submitted by zentrader on Sat, 2010/07/31 - 2:31am » reply |