TRADING STABILITY IN AN UNSTABLE WORLD

 

In the aftermath of an unexpectedly shaky General Election, a highly politicized tragedy in the Grenfell Tower fire and the start of Brexit talks in Brussels, we asked Lee Sandford for his advice to retail traders in such unstable times.

How should traders respond to what’s going on in the news?

Lee: We shouldn’t change our behaviour at all. It’s easy to get sucked into the drama when big news stories break, but when the world is so volatile, we need to be even more aware of the fact that we are technical analysis traders. This means we only trade what we see on our charts, regardless of what’s going on around us. Don’t trade what you think; trade what you see.

Even when everyone’s talking about the pound dropping dramatically?

Lee: With all due respect to taxi drivers, I always warn my students about the “Taxi Driver Trade”. This is the trade that taxi drivers, or perhaps your mates at your local, are all talking about. Don’t be affected by rumours. Only the big financial institutions can “buy the rumour and sell the fact”. This happens a lot in stock trading. For example, if it’s rumoured that a company is about to be sold, institutional traders will buy stock at a low price based on this rumour. This pushes the price up. When the rumour becomes fact, they dump their stock at a nice high price. Big institutions have more access to information than we do because they have huge teams of economists doing research. If we retail traders try to guess what’s going to happen we are much more likely to lose. You’re only gambling when you try to predict the markets. Right now there is a rumour that Britain is going to get a bad deal in the Brexit negotiations. People believe this will push the pound down. Indeed the pound is falling, but we have no idea what will happen next. Our job is still only to trade what we see happen on our charts and not what might happen because of (even strong) speculation. The big banks and hedge funds will always have more information than us. That is their edge in the market. We don’t have the funds or resources that they have. Our edge in the markets, as retail traders, is our charts, our technical analysis. We trade off the results of the actions of the big financial institutions, not alongside their actions. We have no way of knowing exactly what effect those actions are going to have on the market before they’ve happened.

Should we ever read the news?

Lee: That’s up to you. There’s actually no necessity, as a technical analysis trader, to follow the news. The only thing that should inform your trading is what strategies you’ve chosen to follow, and what your indicators tell you to do. The footprints of the markets’ activities are all shown on your charts. Your charts are the only place you need to look when making trading decisions. Personally I do like reading up on the effect world events have had on the markets, I find it fascinating, but only after events have shaken the markets up, beforehand I always stick to my systems and processes. I never let the news inform my trading decisions. 

Surely the more you know the better you’ll be at trading?

Lee: Not necessarily. I’ve seen very academic and successful people crash and burn when it comes to trading because their egos get in the way. They overthink things; they can’t handle loss. Being a good technical analysis trader is all about sticking religiously to a plan, following a strategy, and leaving your opinions and ego at the door. When your strategy tells you to get into trade, you get in; when it says get out, get out, even if it means taking a loss… regardless of what you think. The Crude Oil market is a great example of how people think they can make predictions. So far this year, the price of Crude Oil has dropped from around $50 a barrel to around $42. People assume it will always recover. They think, “Surely we always need oil… it’s what makes the world function these days.” But, when we are trading as technical analysis traders, we’re not interested in logic, or instinct, or assumption, we are only interested in what our charts are showing us and what our strategies are telling us to do.   

Is this a good time to be trading, with all the uncertainty in the world?

Lee: Yes. Volatility is good for traders. But when the world is this volatile, where it seems anything can happen (Britain voting for Brexit, Trump winning the US election, Theresa May losing her majority in government, etc.), it’s more important than ever to stick to our guns and only trade according to what we see on the charts, not according to what we hear in the news. Technical analysis trading—trading off charts using set strategies—is a great tool… it makes trading easier and takes the pressure of us because we are not required to make any predictions, we are just following the market and responding to what actually happens. I stick to this and that’s why I regularly make a 20-30% return every month. This is what I teach my students. Do what I do and you can have similar results!

Thanks for all the great advice, Lee. We’ll do our best to keep things simple, stick to the plan, ride the waves and enjoy the results!