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.

Cheers,