Trend Following and an Identity Crisis
What are we doing?
It dawned on me, seemingly out of no where. I, and most technical analysts, are looking at it all wrong. it should be so simple, so obvious, yet is disregarded every single day.
In a rising market, everyone–and i mean everyone–is looking for resistance levels. In a declining market, everyone is looking for support levels. if one were a range bound trader, this is probably the mindset needed. however, day in and day out i see trend followers doing the same thing. its pure insanity.
We preach that ‘the trend is your friend’, ‘for a rising trend to change to a declining one you need lower highs and lower lows’. Yet, a mindset of looking for resistance in an advance is the exact thought process that denies us the ability to follow trends. we have a self identity as trend followers, yet think with the mindset of a range bound trader.
This undoubtedly is a problem, if not an identity crisis.
No wonder so many people cant make money in the markets. ill often bring up that most people when looking at fundamentals miss the boat. that they have the mindset that they should just be able to look at a stock, and if its ‘cheap’ based on what they see, then the stock ’shouldnt’ go lower. Yet this is often the case (and Warren Buffett would say thats a silly assumption). Yet, we trend followers, chartists, technical analysis, we look at support and resistance levels in disregard for trend. if there is an upcoming resistance level in a rising market, that becomes the focus. even though we do not have evidence of lower highs and lower lows.
A New Motto
Support and Resistance is a derivative of trend. In an uptrend, we want to buy dips. Correct? This means resistance levels need not be of importance in a rising market. Instead, when the market rises we should be looking for the next support levels and not resistance levels. When a market is declining, we must stop obsessing with “when will it stop?” We should be looking at potential resistance levels as places to potentially initiate new short positions.
Fear and ego drives this identity crisis.
It sounds easy, but there is an internal drive that causes us to focus on levels and limits to the market as opposed to trend. We fear to death that we’ll be the fool who bought the top of the market, the hand ringing loser who sold at the bottom. So we “protect” ourselves by looking for evidence that the market is turning, that we should be exiting because of a level that the market shouldnt breach. we create fibonacci retracements and extensions, look at days of the month, momentum indicators, oscillators, prior levels the market turned at. we attach bollinger bands, keltner channels, resistance lines–we do whatever we can to constrain trends and put them in a neat little box.
Just doesnt work that way is all. doesnt help us make money. Im aware some, many…most, are actually not in the market to make money and there are deeper seated desires being sought out. I’m just attempting to not be one of them.
