Friday, August 31, 2007

Looking at Inverted Charts and Psychology

One thing that I have often been guilty of when trading is focusing on all the bullish aspects of a chart when I am long, and concentrating on all bearish aspects of a chart when I am short. I do not do this intentionally; it happens to me, and most other traders, subliminally.

But maybe Mark Douglas, author of "Trading in the Zone" can explain it better than I can:

"When we expect to be right, any information that doesn't confirm our version of the truth automatically becomes threatening. Any information that has the potential to be threatening has the potential to be blocked, distorted, or diminished in significance..."

Because of this fact, I try to look at my charts from the opposite perspective, and I do this by looking charts upside down. For example, when I trade the TSX, I can look at two ETFs, one that does twice the performance of the TSX, and the other that does twice the inverse of the TSX:


These charts are basically mirror images of each other. When one chart is overbought, the other is oversold, and so on. Currently I am long the TSX, but I will also keep an eye on the short TSX fund just to see things in another perspective.

I will ask myself if I would be satisfied holding the short fund right now. I will try to look and see if there is anything positive about the short fund. If so, then perhaps holding the long fund may not be such a good idea.

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