Last week, I wrote that I expected a bounce in crude before long, and as WTI has continued to fall the trolls have had a field day, pointing out that I was wrong. Let's for a minute not dwell on the fact that I said it may not happen immediately and assume that it was simply a wrong call. I can only assume that those pointing that out have never traded or are new to it as a pastime. The simple fact is that in a dealing room, pointing out that somebody got a call wrong is like pointing out that they are breathing. Getting things wrong is an everyday, or rather many times every day, occurrence; what defines you is how you deal with it and what you do next.
Sometimes that means simply changing your view. To do that involves understanding something fundamental…the market can never be "wrong". I was taught early in my dealing room career that while you may believe that the market is missing something important or misinterpreting some information, the price is simply an expression of the last point at which two counterparties were prepared to transact. As such, it can't be "wrong". That is encapsulated in the old saying that the market can stay illogical a lot longer than you can stay solvent.
In this case though, while I understand that the market isn't wrong, I do believe that fundamental and technical factors combine to make a rapid reversal likely at some point soon and am therefore prepared to have another crack at a long position. The potential rewards to this kind of contrarian play skew the risk/reward ratio in your favor providing, of course, that the potential loss on each attempt is limited by setting and sticking to a stop-loss level.
(Click to enlarge)
That doesn't mean, however, that you should just keep buying at random places until you get it right. You should have a reason to believe that a level may be significant and wait for proximity to that level so that a reasonable stop can be set off it. In this case there are two such levels related to inflection points earlier in the year, just below $60 (blue line on the chart above) and just below $58 (yellow line). As I write, WTI has already breached the level around $60, so the entry point for a trade would be either the $58 level or a sustained bounce back above $60. In either case a stop just below the level itself would keep potential losses small.
The obvious inherent riskiness of a trade like this dictates that positions should not be too large either, which further limits exposure. They should, however, be large enough to allow for a partial cut strategy. The idea would be to cut around half the position for a profit is we get a bounce of a couple of dollars and then set a new stop to lock in at worst a small profit, allowing the balance to run for a while with a trailing stop to maximize the potential profit.
For nearly twenty years, my job entailed understanding the mindset and methods of traders and it became clear during that time that success required a seemingly contradictory mix of arrogance and humility. It takes arrogance to trust your own analysis enough to pull the trigger on a trade, but humility to quickly admit when you are wrong, cut the position and move on to the next deal. This time, the next deal is another crack at the same thing. There is a chance that it will be wrong again, but if it is, please don't bother to point it out, as by the time you do, I will have already acknowledged that and moved on.
By Martin Tillier for Oilprice.com
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