Dirty Trading Words – Part 1

The late George Carlin used to have a great routine on the hypocrisy of the seven unspeakable dirty words not permitted on radio or television. We all know them and there’s no need to repeat them here. As I’ve had one crappy day today I’ve probably been using all of them several times over – but that’s a different story.

There are however is a list of dirty words I myself have been adding to my trading vocabulary over the years. All of them share a common theme – either they are essentially meaningless or they are aimed at manipulating retail traders into making bad trading decisions. And in that respect what we are dealing with is Neuro Linguistic Programming at its finest. Let’s cover two of them today – actually it’s really just one with a downside variation:

Overbought and it’s bearish cousin oversold.

Every time I hear or read either of those two words my brain lights up and I’m ready to tar and feather the culprit who uttered it. Yes, I have been guilty myself once in a while – here I’ll admit it. But to my defense it’s always been in the context of keeping you guys from picking tops or bottoms, e.g. this tape is overbought by any definition but don’t assume it can’t run even higher. But in the future I’ll make sure to add an appropriate disclaimer as I should not contribute to the propagation of harebrained definitions/concepts.


So what’s so bad about using these two words, you ask? What’s the harm? Because they have absolutely no meaning – that’s why. Just think about it: OVER BOUGHT. What does that mean? Too much has been bought and there are no buyers left? Fine – but if that’s the case when and how do short squeezes happen? That’s right – in so called ‘overbought’ conditions – that’s when. As a matter of fact buying high and selling low is a favorite past time of trend traders and although they are wrong most of the time – when they are right they are very very right and hell hath no fury like a short or long squeeze on steroids.

Just look at the current situation in equities? When exactly do you think the tape here was ‘overbought’? At 1950? At 1970? At 2000? Yes, yes, and yes. So we can derive the following – the word is meaningless as it offers absolutely no value to our trading activities. It’s a cognitive bias with the underlying assumption that buying can not continue just because a lot of buying has preceded it. There are no rules and there is no script as to how tape ‘is supposed to be’ behaving. As a matter of fact markets across the board have a knack for punishing the majority of participants every single day. And usually it’s the ones who share a common belief. Remember one of our prime directives – what everyone knows is not worth knowing.

So why are these two words continue to be used? Because just like any old superstition people have a tendency to believe in things that they have never spent one second investigating. Which is wonderful news for institutional traders as they always need more meat for the grinder – and guess what – you are it. So keep using these words and, despite all evidence to the contrary, keep believing in whatever you are being told about how the financial markets are ‘supposed to’ work. Because actually sitting down and collecting your own statistics would be hard work – and nobody really is interested in that part. I mean banking fortunes by trading the market should be easy right? I can just download some fancy trading app like TOS, open an account, and then let the fortunes flow in!

Moral of the story: Challenge everything you ever hear or read, especially when it comes to trading or making money.


USD/JPY – that hammer is looking pretty nice here and I am willing to enter at today’s highs (which may still change) in tomorrow’s session. Put your stop either below the NLSL or the low of the hammer.

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If you have collected your own list of dirty trading words then please submit them here. I’ll make sure to add them to mine and cover them all over the next few weeks. It should be fun and hopefully it’ll serve to prepare you once (and not if) you come across any of them the next time around.


Please Report To The Psych Ward!

So Thor triggered on crude a few days ago and after weeks of sideways pain I wasn’t particularly thrilled. But nevertheless the entry was taken according to Thor’s tested trading rules. The day after didn’t serve much to change my initial outlook:


What would YOU expect to happen next? Exactly. Señor Mole, please report to the psych ward!


Except that I don’t listen to my emotions (ask Mrs. Evil) – and was rewarded a little over a session later. That’s another 2R in the bank. Moral of the story: emotions = bad – system trading rules = good.

While we’re on the subject – I have been a busy bee and am about to unveil a little goodie for you Thor subs.

See you on the other side of my trades.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


¡Ave, Mercatus, Morituri Te Salutant!

In principle all financial market operate in two alternating operational modes, both of which are aimed at evoking a reaction among active participants. It’s basic human psychology 101 exploiting the fact that the reptilian brain of us mere mortals responds to these two basic stimuli in a same fashion:

  1. If you chase something it will elude you. Also, evasion instinctively triggers a hunting response of varying degree (depending on personality type).
  2. Intellectualization is used as a defense mechanism for avoidance of pain. Self preservation is the mother of all rationalization.

The first one is a lesson especially men (mostly) learn the hard way during their teenage years and into young adulthood. And yes, I am talking about meeting and attracting the other sex - we all know how it works. The second one is a bit more complicated but a similarly basic human response. It all boils down to removing one’s self, emotionally, from stressful or painful events. Intellectualization comes in many many ways and it’s an extensive topic – in regards to the behavior of market participants we are specifically talking about evoking irrational/fearful acts in response to either an unfavorable/unexpected event or a lack of information/context which lures people into inventing reasons to resolve their emotional stress/pain by acting against their system rules or contrary to objective system goals.


I know – all that is quite a mouthful. But you’re in luck as this week has been a great opportunity to drill into this topic, so let me demonstrate this via the NYUD chart shown above. We see both modi operandi in action right there:

  1. Evasion.
  2. Luring the prey.

Very simply put – the market either runs away from you or attempts to lure you into taking (unfavorable) positions. It will pretend, it will lie – it will fake you out. There are exceptions of course and there are times when the odds are in our favor. The rite of passage for any trader is to identify those rare moments and act upon them.

Nevertheless without understanding how the game is played many fledgling traders may often find themselves unable to take action due to a recent thrashing, inverse exposure combined with wishful thinking, a strong personal opinion, the list is long. But the fact remains that the market very rarely give you perfect opportunities to get positioned. Yesterday was such an exceptional day and although a good entry does not guarantee success you must be ready to take action when it presents itself.

The vast remainder of market activity however falls into the two categories above – luring and evasion. In both cases it is aimed at evoking a reaction. For instance Monday and early Tuesday being short was a very scary thing and the tape was intentionally attempting to lure participants into abandoning short positions and acquiring long positions. Today however the opposite holds true – if you took a short position earlier this week then you are most likely feeling doubts and a host of other unpleasant emotions right now. To which of course there is only one answer:


Exactly – emotions are irrelevant. If you yield to them as a trader you will constantly face emotional pain and self doubt. NOT a way to pass one’s short existence on this mortal coil. You should NOT care whether or not this campaign is going to succeed or what you could have done earlier this morning to avoid giving up your ill gained paper profits. The only thing that does matter is that you snagged a good entry and that your stop has been set. You didn’t seriously expect a setup in equities (the most manipulated market of all) to move unidirectionally? If you want clean trends then please forget about equities and visit us in the Forex or futures lair.


The realities on the equities side are as such: The bulls are in trouble and will remain to be until SPX 1960 at minimum and they’re not back in control until about 1970. Today’s jump higher is an attempt to regain the weekly NLSL which must by all means be recovered before Friday. Maybe they’ll succeed and maybe they will not. What matters is that you took the entry when it represented itself. The ES campaign on Thor already has its stop at break-even – nothing else left to talk about.


Here’s the daily ES chart – all I’m seeing are lower lows and lower highs. Yes, we could be done here – I don’t have a crystal ball and there is no context nearby to suggest that a major low has been produced. Now if we push back above 1970 then the dynamics start shifting but until that happens we stick with what we have – which is short positions in equities and their respective stops.


The NQ is the big exception – that 100-day SMA touch could signal that we it’s done here and it’s the perfect chance for the bulls to stage a counter rally. However I do caution you from chasing the market here – remember that’s modus operandi numero uno and it never ends well (for us). So if you want to be long – wait for a better opportunity.

Now let’s talk setups – we have a few juicy goodies waiting below the fold:

More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!

Please login or subscribe here to see the remainder of this post.


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