Three traders find themselves standing on a road at the top of a mountain. All three are looking over a blind crest, wondering what is on the other side.
The first trader announces to the other two, “Look at how the camber of the road leans a little to the left. Obviously that means the road turns left on the other side of this crest.”
Confidently, the first trader jumps in his car, turns the wheel to the left, reves the engine, closes his eyes, and guns it.
A few seconds later, the other two traders flinch as they hear crashing sounds coming from the other side of the blind crest.
The second trader responds with, “Can you believe that idiot, what was he thinking? If you look at the terrain a little further down the valley, obviously the road turns to the right on the other side of this crest.”
Confidently, the second trader jumps in his car, turns the wheel to the right, reves the engine, closes his eyes, and guns it.
By now, the third trader is not at all surprised when he hears the sound of crunching metal coming from the other side of the blind crest.
Hopefully by now, everyone realizes the point of this story. Successful traders react to what the market gives them. They don’t just guess at what is ahead and blindly trade it. And as such, the third trader calmly gets in his car and with his eyes wide open, carefully navigates all the twists and turns on his way safely back down the mountain.
If you want to survive in this business, you must react to the market as it comes to you. There is nothing wrong with making educated guesses about what lies on the other side of a blind crest. But by no means commit to that position regardless of what you find when you get to the other side.
In our current environment, there is nothing wrong with having a bullish or bearish opinion about these Coronavirus shutdowns and the unlimited resources governments are throwing at the problem. It’s human nature to anticipate what’s coming. But when we get to the other side of the crest, we must follow the road, not our biases.
Three weeks ago that meant buying a relentless rebound no matter how far we were above the March lows. This week, that meant locking-in profits as prices slumped back to support.
What is coming next week? I’m not sure. But I do know that if we go up, I will be buying and if we go down, I will be selling. What will you be doing?
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