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Conventional Trading Wisdom That Contradicts Itself

By Robert Colville on October 24, 2014

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In the markets, we work each day at blocking out “noise,” taking things in their proper context, and identifying high-quality trade set-ups, and that’s pretty much the aim of every trading methodology in a nutshell, right?

Often, though, that’s made more difficult by the clashing of conventional trading wisdom that happens in the news and financial press. You know, the “experts” we see every day on TV and the Internet?

Now, I know, the talking heads are easy scapegoats, but let’s face it, “noise” is their business (and business is good!), so they’re always quick to stir the pot with controversy…whether it’s there or not.

Truth be told, though, conventional trading wisdom has actually gotten to be so plentiful that it’s hard to know what to believe anymore. While one popular tip or tenet tells you to do one thing, there’s another one out there telling you to do the exact opposite! So how do you know which is correct?

Well, that may depend on your methodology, but let’s at least start by revealing a few pieces of conventional trading wisdom that are conflicting in nature, look at the facts, and see which side makes the most sense for you moving forward.   

Trade with the Trend…But Buy When Others Are Fearful

Who among us doesn’t love riding out a prolonged up- or downtrend? It’s fun and comparatively stress-free, especially when compared to trying to pick market tops or bottoms, which is rarely, if ever, advisable.

The Lazy Trader methodology, in fact, is trend-Conventional Trading Wisdom: Trend Tradingfriendly, and for that reason, I guess I don’t particularly like the conventional trading wisdom that says “Buy when there’s blood in the streets,” or when others are selling and fearful.

Unless you’re contrarian or a much longer-term investor, that seems quite counter-intuitive, doesn’t it? Whenever the charts signal fear or downward momentum, we would rather trade in the market’s confirmed and prevailing direction, not go against it.

And, until viable signals emerge that suggest a reversal or end to that downward momentum, it’s decidedly better to be short, anyway.

That’s because our goal is not to capture every pip, but to at least catch the “meat,” or middle portion, of that downward move. Then, once the trend has ended and/or reversed, we would look for opportunities to catch the meat of the reversal to the upside, thus trading with the trend in both directions.

See also: A Pin Bar Reversal Trading Strategy

Trade with Conviction…But Don’t Be Biased About the Markets

Conventional Trading Wisdom: Don't Be BiasedIt appears there’s a fine line somewhere that delineates this conventional trading wisdom, as this is undoubtedly a hang-up that plagues many traders. Afterall, how are you supposed to be fully committed to your trade, yet at the same time, be ready to give up on it at the first sign of trouble?

Well, here, as they say, “The devil really is in the details.” You see, your conviction has to be in the validity of the pattern or set-up, not in the market or asset you’re using to trade it. And, from that perspective only, this conventional trading wisdom actually does make sense.

A trader’s job, afterall, is to execute a proven trading strategy, not to correctly forecast the markets, or even care so much about their overall direction. With that, you’ll only trade set-ups that are in accordance with your strategy, and that you yourself believe in. That’s what it means to “trade with conviction,” and the strongest conviction should actually stop right there.

Any conviction about the outcome of a trade, however, is misplaced, because following trade execution, the results are entirely in the hands of the market and are beyond our control. This is no time for costly trade biases or excess conviction, as that could cause you to let a losing trade run even though the signal(s) that initially inspired the trade have since been invalidated.

See also: A Disastrous Losing Trade and the Great Trader Who Took it

As you can see, there is a fine line here, and it’s that conviction is reserved for the planning and execution stages of a trade, and not the end results. This time at least, it seems the conventional trading wisdom is quite valid, but only if your “conviction” is directed properly.

Trade the News…But Play the Reaction

Conventional Trading Wisdom: News TradingNews trading actually sounds like a strategy all its own, but there are multiple ways to plan and execute news-based trades, and as a result, there are a few ways to look at the conventional trading wisdom as well.

Trading the news” has this connotation that you act on the announcement, but then there’s also the conventional trading wisdom that says “Play the reaction to the news,” and that suggests something entirely different. So, do you trade the announcement or wait for the market to digest it?

Well, that depends on your strategy, and maybe your personality and risk profile, but for trend trading, it may be decidedly better to wait for the reaction to the news. That way, the initial shock waves have already resonated throughout the market and there’s less chance of getting whipsawed in the heat of the moment.

This happens to be one of the distinct advantages of end-of-day trading, but it’s also an example of how “trading the news” has multiple iterations out in the market. You can’t necessarily just take the conventional trading wisdom at face value or you’d be glaring at a TV or news feed for hours each day and firing off trades in frantic succession, and even then, you’d likely be late to the party more often than not! There’s a better way to trade if you know where to look, and fortunately, we do!

Conclusion

So many people out there will try to tell you that trading is easy, and that “all you have to do is…(insert conventional trading wisdom here.”)  And, you know, those little things do make it sound pretty easy sometimes!

Now, trading can be simple if you have a clearly stated, uncomplicated methodology, but calling it “easy” would really be pushing it. Especially since we now see that a lot of that conventional trading wisdom that gets spouted out there in the industry can be really conflicting…and we’ve barely scratched the surface here!

Start putting conventional trading wisdom in its proper context, and just like you would any other information, or investment or trade ideas, consider the merit yourself before putting any real faith in it. Afterall, just because something sounds good doesn’t mean it works! 

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Robert Colville

The Lazy Trader is a fund level Forex Trader who trades for no more than ten minutes a day. If you want to learn to trade successfully in his set-and-forget style, have a look at his online trading course

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Robert Colville

The Lazy Trader is a fund level Forex Trader who trades for no more than ten minutes a day. If you want to learn to trade successfully in his set-and-forget style, have a look at his online trading course

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