You can put up all those colorful indicators and you can watch price moving up and down and pretty soon it’s not money at all — it’s entertainment. Hey, if some traders approach Wall Street like it’s Vegas — why can’t I pretend it’s X-box?
Anyway, all of that changed when I read a killer little book written by Jason Alan Jankovsky called The Art of the Trade — What I Learned (and lost) Trading the Chicago Futures Markets.
Without a doubt, it was the first book that let me see that the market is made up of PEOPLE. And when you look at a chart — or better yet — when you’re looking for a trading opportunity on a chart, you would do well to consider charts where a lot of PAIN to be found.
What this means is this — find charts where a lot of traders are trapped — and then trade against them!
Let’s take a look at an example. Here’s a nice winning chart for CIG from last year.
That’s a nice 60% gain over a few months and a trend anyone would have liked to be on. Except for the losers — AKA — trapped short sellers. And at the beginning of the trend we can see where they it happened.
At the beginning of the trend, after a nice run off the bottom, CIG traded up over the 50 day MA.
A lot of short sellers will look for a bounce like this to fade — meaning they will sell shares short into the bounce as they build their position. Or they’ll wait untill it starts to break back down below the 50 day MA (the circle on the chart) — and grab their positions then.
But what happens here? Does price continue to break down and prove the short sellers right? Let’s take a look…
A couple days later we get a big gap up and we have a bunch of short sellers trapped.
Now, logic tells you that if you find yourself trapped in a situation, you should get the heck out!
But that’s the beauty of the market — it isn’t logical. Those poor trapped short sellers will think — Awwww hell no! This is another fakeout! Price will come back! This stock is crap, it has to crash! I’m gonna add more to my position and get an even better price!
Yeah. Okay. Once that denial sets in we’ve got the making for a strong trend in the exact opposite direction. And for CIG we all know what that meant.
Let’s look at the chart again, with the trap circled this time.
Do you see what I mean? And yes, as you can see, the denial of trapped traders can last a long, long time.
What about you — have you ever found yourself trapped in a position, on the wrong side of it, fighting against it, afraid to open your broker account to see the damage? Man, I have! That’s why this idea makes complete and total sense to me.
So next time you find yourself stuck in a trade — ask yourself how it happened — and then look at the chart you’re in.
Maybe you’re trading against a trend. Maybe you’re going short when you should be going long. Whatever the reason, take notes — and then go hunting for those situations.
In his book, this is what Jankovsky aptly calls “looking for the loser”.
When you look at a chart ask yourself — where’s the loser? What is the loser doing? What was the loser’s entry? Where will he call it quits?
And if you can’t find where the loser is — watchout — you might just BE the loser!