Developing Gut Feel

Recently I was standing out front of my house talking to my parents who were over visiting. A car drove by and I casually mentioned “they’re lost.” That prompted the question, “how do you know?”

I told them that I knew because I’ve lived on this street for a few years. It’s not that I know the cars (I’m no stalker!), but rather that I’m just familiar with the neighborhood. There are efficient ways in and out, and those who live here know that. So, when cars drive right past the nearest side street, it’s clear to me that they aren’t familiar with the area and therefore don’t know exactly where they’re going.

Who cares!? And what does all of this have to do with trading, you ask?

A lot, actually.

Insignificant as it may seem, I learned what I just explained about my street from spending time outside and casually observing it while playing with our kids. Now, I trust my intuition when I see a car go by that doesn’t conform to the norm.

In the market, it works the same way.

gut_feel_tradingYou put in time, you develop some gut feel, some intuition, and you have a little more to base a decision off of than had you not developed that feel. You may not always be right, but you have something extra to rely upon when making decisions and it comes from the time you’ve spent observing and participating.

Here’s a relevant side note.  Just this week, I had a conversation along these lines with a Bandit member. He had recognized that he was not relying on himself enough and the work he was putting in each day for his trading plan. He is not at all new to the market, but had been struggling to take some of his plays alongside those of mine he liked.

I told this trader a couple of things…

First, the nightly service provided here is my trading plan for tomorrow, and it’s intended to supplement the work he is already doing – not replace it. When he wanted some additional ideas to add to his own, they’re readily available nightly. There’s a lot of value in not only having some additional ideas like that to turn to, but also noticing what kinds of plays are working best right now.

And second, he has been putting in the work to develop his trading plan and needs to rely on his work and trust that it will also produce.  His intuition of what comprises a quality pattern by now is absolutely valid, so that ought to carry some weight in his trade selection process.

Back to this idea of gut feel, it’s interesting that newer traders love to act on hunches when in reality they have so little to base those hunches on. Experienced traders don’t force opinions, they just pay attention to their intuition when it comes calling and they factor it in.  There’s no magical belly-rubbing involved (thank goodness)!

The more time you spend observing the market and trading, the more reason you will then have to trust your own gut feel and intuition. But it won’t happen overnight, so put in the hours if you want to have it.

Trade Like a Bandit!

Jeff White

P.S. Through the nightly service, I share swing trade setups with members here including my planned entry, stop, and target levels. Check out the trial if you’d like to kick the tires.

Drawing Conclusions on Trend Lines

I trade a lot of trend line breaks, but not all of them are equal.

Especially right now in what has been a pretty lethargic tape of late. Take for example the S&P 500, which has edged higher by roughly 1% since making an all-time high through 2093 less than 2 weeks ago.

Don’t get me wrong, this market isn’t weak, but 1%? In 2 weeks? After breaking out from a multi-month trading range? Hardly what I’d define as momentum.

Back to the trend line conversation though, I don’t treat them all alike. Discussing part of this yesterday with a fellow Bandit, I got to thinking about it and wanted to share a few thoughts.

The question I was asked revolved around descending trend lines in the current environment, and the fact that many stocks have been able to clear their respective descending trend lines but not power higher.

So, here are 3 situations where I’m currently giving trend line breaks a bit more validity:

Steep Descending Trend Lines. Generally, a steep trend line is indicative of some serious pressure on the stock, so once that is alleviated, it tends to spike a little better. Imagine being held underwater for a short time, then being set free to surface. You’d pop up quick if given the chance. In a quieter tape, favor these kinds of plays for short-term lifts.

steep_DTL

Momentum Before the Trend Line. By this, I mean I like when the stock has exhibited some nice momentum prior to the trend line forming, whether that trend line is lateral or descending. It’s a bigger-than-normal move ahead of the rest phase. I’ve noticed that those stocks tend to find better follow through once they get back on the move, as traders identify them as recent runners and don’t quickly cross them off their watch lists.

momentum_TL

Rhythmic Trend Line Breaks. A stock that has been moving in a recent rhythm is going to need something to interrupt that rhythm in order to stop. So unless that interruption has taken place, I expect more of the same. Look for similarly-sized rally phases, as well as rest phases of similar duration (___ days). Once the newest trend line gets crossed, it tends to find some traction.

rhythm_TL

Trade Like a Bandit!

Jeff White