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Risk Management, Technical Analysis

Naive Speculators Were Hit Hard

Speculators who rely on naive analysis of price action were hit hard yesterday. In the case of the DIA, HFT algorithms got the speculators both sides. In the case of TLT shorts were shaken out. This is how professionals make money at the expense of naive speculators and this is a perfectly natural function of the market that rewards those who provide massive liquidity.

A 2% up move in TLT with the majority of speculators in short positions is a huge hit but some expected it. This won’t be an easy ride. Speculators and naive chartists will be hit hard multiple times. Again, I want to clarify that I’m not talking about experienced professionals who use charting but about inexperienced traders because in the past I have been misinterpreted. This is what happened in TLT:


Resistance after yesterday’s move is near $120. Those who expected an easy ride below $116 are now counting their losses. This won’t be easy. After 2 years bears may be wondering why bonds are at such a low price level but at the same time they have lost everything. This is how the markets work. You may be right about the longer-term trend but in the short-term lose your shirt to those who control the game by moving size.

Next, channel breakouts may be still popular even after 50 years or more from their invention but be sure HFT algorithms have that knowledge. Thus, yesterday they took the stops set above and below a flat channel in DIA:


The thing is that those who look for a breakout still have no idea of the final direction. The market will not make it easy for anyone who relies on naive methods that are evident to anyone with a mobile phone connected to the Internet. To make it in this new market environment you have to, amongst other things:

(1) Increase position risk by widening stops to account for increased volatility
(2) Increase capitalization to maintain same return expectation
(3) Know the expectation of every trade and its probability (both are required and arguments that the expectation is not enough while they are true they are also hopeless straw man arguments.)

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software.”) 


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