As I get older, I increasingly derive a great deal of satisfaction from sharing with others the lessons learned over nearly twenty years in dealing rooms around the world. There are some lessons that are worth remembering in general life as well as at a trading desk. As a trader I knew once proved beyond a doubt, for example, using scissors to cut through the power supply cable in order to punish and kill a computer that has dared to show the market moving against you is a bad idea. (Yes, Henrik, wherever you are, I am talking about you.) Some lessons, however, are specific to the market and, if understood early enough, can ensure a long and successful career. One of the most fundamental of those is that trading offers no certainties.
That may seem like a statement of the obvious, but if you start using a system that produces a run of winning trades it is easy to believe otherwise, and that is the most dangerous belief a trader can have. Certainty that your trades are certainties leads to only one certain thingconclusion…a spectacular bust at some point. The belief that you cannot be wrong makes cutting losers and managing losses almost impossible, and it is that, rather than picking winners, that separates the career traders from 90 percent or so of trainees who fail.
Once you accept that any price can move in any direction, some less obvious trades often look smart. Take oil, for example. I have been saying for some time now that the more times WTI approaches the $62 level and then backs off, the more significant that level becomes. We saw exactly that again this week, marking the 5th time since the beginning of May that futures have powered through $60, only to back off again.
On the surface, increasing the significance of a resistance level like this makes it more likely that at some point soon the downside will be tested, but that isn’t the only significance of a solid chart point. It also means that a break in either direction is likely to be exaggerated. Shorting futures or, for those who trade only in stocks, the US Oil ETF (OIL), is a fairly obvious play from here but it is one that, because it is so obvious, it is becoming a little crowded as a trade. If WTI does break above $62, all of those shorts being squeezed will provide significant momentum to the upside.
Short oil looks like a certain winner, but as we know there is no such thing. It is important to have a plan for if things go wrong and the…