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Surfing the Markets
The Smart Profits Report: Issue #347
Tuesday, August 22, 2006
Surfing the Markets: Two Ways To Combat Choppy Waters In The Markets
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research
“If you want to know everything about the markets, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.” - Market Wizard Ed Seykota
I’m a surfing purist. No boards. No sails. No kites. Just me and the waves. That’s right - I’m a body surfer. My friends who use various objects to help them ride the waves look down on body surfing as a simplistic pursuit. Perhaps. But there’s something pure and untainted about it. Just me and the water.
Body surfing is about finding the right wave, then picking the moment to lie down in front of it and letting it rush you to the shore. And the fact is, there are striking similarities between body surfing and trading or surfing the markets - and some truly important lessons that you can use to improve your trading by learning to think like a surfer. Treating the markets as a wave that you can surf is one of the keys to successful trading. Here’s how…
Catch a Wave and You’re Sitting on Top of the World…
There are already several investing techniques that mimic the waves - the Elliott Wave Theory is perhaps the most obvious example.
I’ve had many discussions with a trading colleague of mine about the similarities between surfing and trading the markets. (The only difference between the two of us: He’s a real surfer).
Let’s look at a couple of practical application points for your trading and investing and how you can ride the “market’s waves.”
Why the Ocean Is Like the Market
What do you see when you look at the ocean and the movement of the water? Some see cycles, some see the inevitability of going with the flow (or with the trend). But it’s hard to argue with the power and constancy of motion. Both are always there. If you approach the markets and don’t understand their power, you can easily get swept in the wrong direction.
And just when you think you’ve figured out how things move, you can be sure of one thing - they’ll change again. The markets, like the sand and waves, are in constant motion. You have to adapt to changing conditions. That’s one of the most powerful lessons from the 2000 bubble: The market doesn’t like certainty. Things don’t just keep going up. And as 2003 taught us, they don’t just keep going down, either!
- What You Can Learn: As traders and investors, we have to know what the markets are capable of doing and prepare for worst-case scenarios. This is how we respect the power of the markets. We also have to be prepared for changing conditions at a moment’s notice that can neutralize good strategies, or require a different approach. In doing so, we acknowledge that the markets are in constant motion… that they will always be that way… and we are always prepared.
What You Can Do When the Water Gets Rough
When the waves started to get bigger and stronger last week, most folks headed for the safety of the beach. To some, the waves looked too rough, while for others, those big waves presented the exact opposite scenario. An unexpected treat. At its extremes - when prices have pushed to new highs or lows - some run for safety while others lick their chops at a perfect buying or selling opportunity. Neither reaction is right or wrong; we just need to know what we want to do at those extremes.
- What You Can Learn: Make no mistake: There is big money to be made by “trading at the points of maximum pain or euphoria,” as one top trader puts it. For many, these rough areas are best avoided. But which decision is right for you?
Watch For High & Low Tides When Surfing The Markets
If you like the consistency of routines, then your strategy should be to sit on the sidelines, or switch to “high alert” mode when the market is approaching an extreme price level.
On the other hand, if you handle uncertainty well and manage your risk and emotions with ease, then trading these extremes could present a valuable profit-making opportunity. Spend some time reviewing your reactions to the price extremes that we’ve seen in the past few years. Pinpoint what you’d do differently if you’d known how, when, and where to position yourself when the market probed an area of price extremes, and use that knowledge next time.
Next week, we’ll look at surfing and investment psychology, surfing and (trading) system-building and surfing and trading discipline. Until then, keep looking for that unexpected ride!
Great trading,
D.R. Barton
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Today’s Smart Profits Cribsheet
- Turbulent markets call for a clear, comprehensive trading strategy. With the markets still delicately poised and exhibiting higher levels of volatility, find out how to protect yourself in Smart Profits #326: Stock Market Volatility: Three Ways to Combat Volatility’s “Radical” Shift.
- “The trend is your friend.” When you swim with the tide, rather than against it, you’ll find that not only is this a much easier way to trade, but that adhering to this old investment adage could also pay dividends. Check out the Smart Profits Glossary for the exact definition of a “trend,” plus get links to articles telling you how you can use the trend to your advantage.
Related Articles:
- Breakout & Resistance: How to Anticipate and Profit From These Twin Concepts
- Traders vs. Investors: Seven Questions to Reveal If You’re an Options Junkie
- Large-Caps Stocks: How Point Spread Shows Large-Caps Re-establishing Dominance
The Chart of the Week
Research in Motion (Nasdaq: RIMM) is at a very key resistance point. If it can close above $81.65, it should challenge its March highs. If it can’t… look out below!
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