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Becoming a Better Trader: Don't Fight the Tape

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A game plan or thesis can never trump the action in the tape.

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Over the course of my career there have been times when this rule has worked its way up to the #1 spot in my trading rules. In fact, I probably should consider making this #1 because it is so important. If there is a rule that has cost me and every trader I know more money than any other rule, it is this one. Furthermore, it is also this rule that when truly embraced can take your trading to the next level.

The principle is simple and can be further explained like this: Not a single person knows what will happen tomorrow, the next day or the day after that.

If they try to tell you they do, I can say without a shadow of a doubt they are lying. Now, attempting to predict the future and preparing a thesis with an accompanying game plan are two totally different things. A solid trader always has a game plan developed from a general thesis they have formulated, however the point of the rule is that the game plan or thesis can never trump the action in the tape. If it does, you will inevitably lose money. Ironically, your thesis could be right on and absolutely correct but because the element of time and the fact that the markets are constantly in motion, one can easily go broke before ever seeing their thesis come to fruition.


If you've missed any of Prof. Tatro's series, Becoming a Better Trader, you can catch up with the preceding columns here: Developing Your Personal Rules, Position Sizing, Let the Chart Be Your Guide, Legging In and Stops.


Take the current market, for example. My general thesis is that we are seeing a rotation out of sectors such as financials and transports into areas such as semiconductors and biotech. Furthermore, I believe that we are seeing a global rotation where domestic companies deriving profits from overseas will far outperform others. Where does my thesis come from? I am simply watching the current trends in stocks like Bear Stearns (BSC) and Citigroup (C) against companies like Intel (INTC) or Celgene (CELG). Furthermore, global conglomerates such as General Electric (GE) are showing relative strength not seen in years. These trends confirm this rotation thesis and are what I have been using as my foundation for my trading game plan. You don't have to agree or disagree with my thesis nor do I have to agree or disagree with yours, but the problem comes if and when the tape starts telling me I am wrong and I don't change.

Time and again, I speak to people who subscribe to one grandiose thesis or another regardless of the action in the tape. Sure, sometimes they are right, and when they are they have no problem telling me about it, but many times they are wrong and ironically rather than analyzing their thesis they tend to pound on the table harder or become almost obsessed with seeing their thesis come to fruition.

I have learned over the years that markets do one of three things. They trend higher, trend lower or move sideways. When they are trending higher, one should not try and fight this regardless of what one may believe about the fundamentals or the future. When they are trending lower the same rules apply. When they are moving sideways, one should adopt an unbiased thesis and more than likely trade much less than when the market is in a predictable pattern.

So why do people fight the tape? I believe it is first and foremost rooted in pride. They don't want to accept the fact that they are wrong. It takes great humility to play the markets and be successful and sometimes this is just too great for some people. I believe the second reason is because many people are so afraid of being whipsawed. When they find themselves fighting the tape, and everyone always knows when this is happening because they are losing money, they are crippled with fear in the thought of switching sides just when their thesis will start to be correct.

This is a paralyzing thing and often does play out just as one fears, however when someone resolves to not fight the tape, they should be willing to move yet again even if they find that they have changed sides at precisely the wrong moment. Lastly, I believe people don't realize how long trends can last and they are always thinking that when they make a change from fighting the tape to moving with it, their efforts won't be met with much reward and therefore they choose to stay where they are. Unfortunately, we never know how long a trend will last, but it has been my experience that a trend can last much longer than most can fathom.

The key to the rule is adopting it and accepting it from the onset. Like anything, when you find yourself in an uncomfortable situation it takes some pain to make a change. Whenever I am fighting the tape, unwinding the position is never easy and often is done at precisely the wrong time. However once I start to flow with the tape rather than against it, I find that I avoid these awkward, frustrating and costly situations altogether.

While all my rules sit on my desk in plain view, I have one post it note attached to my computer that I can't miss if I tried. It is quite simple and says: "Don't Fight the Tape."
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