Trading Down A One-Way Street

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Trading Down A One-Way Street
You can often tell the trading sophistication of someone by their market bias. If they are always looking at the long side (a.k.a. - always wanting to buy) then they are probably new to the game. There are quite a few stock traders who don't know what "selling short" even means.

Going Short
I was talking with a commodity broker friend of mine the other day. He was complaining that the futures markets were relentless in their recent decline and were hurting his clients. Indeed, the commodity markets in general were having a mini-bear market after a spectacular advance.




I asked him what percentage of his clients were short and making money on the decline. He thought for a bit and finally said that one client held a wheat put while the rest of his nearly one-million dollar book was long. Ninety-nine percent of his commodity clients were long! Therein lies the problem.

Check Your Bias At The Door
As we all know, for every long position there is a short position in the commodity futures and options markets. Itís a zero sum game. There were short traders on the other side of every position these clients held. In fact, many of these traders were probably jumping for joy as the market declined!

It pays to check your own bull and bear bias regularly. Of course, there are times to be long or short during big moves. However, trading long after a relentless commodity decline is evidence of a bias problem. It reveals that you are holding onto losses despite obvious market evidence to the contrary.

Holding long futures options that are eroding can also lull traders into big losses. The common response is, "I can't sell out here! - I still have plenty of time!" (time to hope for a miracle?). Only when the options' expiration date finally arrives does the harsh reality of the market take hold. The moral of the story is that, the moment that you realize you are wrong and things are moving against you, it's time to start liquidating...

Continued In "Trading Down A One-Way Street - Conclusion"...
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