You must be living under a rock if you haven’t heard about the drop in oil, which has been cut in half since the latter half of 2014. The financial media can’t get enough of its story.
I bring this up because I wanted to share a pretty big trading-related mistake I made recently not only for self-reflection but also helping you avoid the same mistake in the future.
I got long $USO (the United States Oil Fund ETF, which is meant to track the price of WTI crude oil) in mid December somewhere below $21.50. I had a very small position (quarter size) and my stop was roughly a point. I planned on adding to my position if I saw signs of strength. I initially got long because of what I viewed as signs of a short term bottom as it started going sideways after retesting lows, fulfilling my own prediction for 2015 that people will continue to try to catch the bottom in oil (catch those bottoms!). I ultimately got stopped out for a small loss about a week later. While I defined my risk and reduced my position size due to the lack of bullish technical signals, looking back now there was no reason to have gotten long, at least not to for my standards. At the time, USO was still trending down and was below all of the major moving averages I use (on a daily chart) and couldn’t even close above even the shortest duration moving average. It was clearly still in a downtrend. Plain and simple, I broke my rules.
Another, perhaps worse, mistake I feel I made was that I let the noise wrongly influence my trading execution. A cardinal sin! I read countless articles about the collapse in oil as the financial media met my insatiable appetite. I read about supply-side factors, demand-side factors, future capital expenditures, potential effects on the economies of Shale states (the likes of Texas, the Dakotas, etc.), rig counts, this, that, and a little more this. “Oil can’t go much lower” Wall Street analysts and economists seemed to collectively guarantee. It wasn’t as if I said to myself, “OK, these Wall Street analysts say oil shouldn’t go much lower so I must buy.” Instead, I think I subconsciously let others’ views negatively affect my own trading behavior, looking for even the slightest bullish sign in something that was in a strong downtrend. What a piker move!
Which brings me to the point I wanted to share when I first started this post: You may have this strong belief or thesis about a particular asset class or a specific stock due to your own proprietary research or economic forecast. But are you really able withstand the time between the ostensible disconnect between the market and your belief? As Keynes simply said, “The market can stay irrational longer than you can stay solvent.”
Just a bit of clarification, I’m not advocating you eschew fundamental analysis (which foundation rests on finding market discrepancies in value and price, more or less). In fact, I think some of the best traders use a combination of fundamental and technical analysis. But again, I stress (at least my belief) the importance of waiting for price to truly confirm your thesis before acting. The risk/reward will comparatively be so much more in your favor if you do so. And be sure to not let your underlying thesis cloud your objectivity of the unfolding price action (e.g., trying to call those illusive bottoms in oil).
Related Reading: My friend and fellow DRC author Tom Bruni shares what he’s seeing in oil.
Please let me know if you have any questions or comments.