Buy Sell HoldApparently, it’s not just the Brits who love an underdog.
Traders around the planet like nothing better than to buy shares that are down on their luck; and to sell off the ones that are on the up.
Of course, if you get it right, there’s lots of money to be made by buying cheap at the bottom, and selling near the top. And clearly, many traders are trying to do just that.
I don’t know if you’ve had a play around with the IG Index “insights” facility. If you have, you’ll know that it’s a great way to waste an hour of worrying about what other people think.
But one feature on it fascinates me – the client sentiment chart. This tells you what IG clients are doing on each instrument. Are they long, or short?
Almost without exception, if the market is trending upwards – clients will be predominantly short.
And if it’s trending downwards, they’ll be long.
What ever happened to “the trend is your friend”?!
It would appear that retail traders just can’t avoid the temptation of trying to pick tops and bottoms. It’s no wonder the spread-bet firms are getting rich.
What’s wrong with buying cheap and selling dear?
The problem with trying to buy markets at the bottom, and sell them at the top is that market extremes are very difficult to pin-point.
For most of its life, a market will be trending upwards, trending downwards, or stuck in some sideways activity. The amount of time it spends doing major u-turns is minute by comparison. Do you really fancy your chances on catching that moment?
Here’s a daily chart for Wall Street that I looked at earlier this week – an instrument which has almost forgotten what a red candlestick looks like.
Chart
Client sentiment on Wall Street? 76 per cent are short this market.
Of course, indices are due a correction. But they’ve been due one for a while now, and you could have lost a lot of money shorting Wall St, waiting for the correction to happen.
But even more dangerous that standing in front of a rising market, is trying to “catch a falling knife” – i.e. buy into a falling market. While markets tend to grind slowly upwards, they usually fall back sharply, often losing month’s worth of gains in the space of a few days.
Here’s the Aussie dollar, which has been plummeting against the US dollar this month …
Chart
Client sentiment? 61 per cent of IG clients are long in this market.
Playing short-term swings
Of course, most clients on spread-bet platforms are short-term day traders, so they are less interested in overarching trends.
But, as traders, we should never be indifferent to the big picture. Even if you’re day trading, you’re going to make a lot more money (more easily) if you’re taking positions in the direction of the overall trend. The price simply makes bigger, better moves in that direction. If you’re trading against the trend, you’re always going to be battling uphill.
Buying into a market with downward momentum, or selling a market with upward momentum, are both dangerous pastimes.
By contrast, hitching a ride with the trend is one of the most powerful assets a trader can use to swing the odds into their favour, so we need to stop trying to outsmart the market, and just let it take us where it wants to go!
