A Tale Of Two Master Traders

My friend Adam, a millionaire trader, is recommending that his followers take their profits in the S&P 500.

While the price action is bullish, the problem Adam is having is the Williams %R indicator.

He thinks that a serious enough negative divergence has developed between the price and the Williams %R indicator.

Adam writes, “This can be seen in the second attempt to close over the 950 level. Also some of our momentum indicators are showing negative divergences. This means that while the S&P 500 is making new highs for the move, the momentum indicators are not showing the same configuration and making new highs. This can often be the first clue of a potential market correction.”

I’m going to have to disagree with Adam’s video below.

Two lessons I want to teach Guerilla Stock Traders about what Adam has to say: Adam’s points, and the psychology of Adam.

Adam’s Points

The Dines Trend Trading law trumps the Williams %R indicator. This law states, “A trend will continue until a trend actually ends. On days a market trades sideways, assume continuation of the previous trend.” In other words, don’t argue with the crowd, trade with it.

As for the Williams %R, it is not that accurate of an indicator to predict swing trades. In fact, it’s cousin, the StochRSI formed the exact same divergence as the Williams %R did last week, but the StochRSI did it back in the March to April period. Had you been spooked by the temporary negative divergence, you would have sold back in April and missed out on a 150 point gain on the S&P 500. The Williams %R should not be used from peak to peak as a measure of divergence, other indicators are a better measure of momentum. Instead, the Williams %R should be used in a much simpler, more accurate way. The Williams %R should be used for measuring overbought and oversold levels. The scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. When the Williams %R breaks below the -20 line, it means a short term pullback is underway. When the Williams %R breaks below the -50 line it confirms the depth of the pullback and is the sell signal. The opposite is true for an uptrend. When the Williams %R breaks above the -80 line, it means a short term uptrend is underway. When the Williams %R breaks above the -50 line it confirms the depth of the uptrend and is the buy signal.

Psychology of Adam

Now I love Adam to death, we go way back, but the video you are about to see below reveals something about Adam. Remember when I said that good traders are amateur psychologists? The psychology of Adam is that he runs a traders blog and he wants to be the one that predicts the next downturn in order to gain prestige and even more followers. Deep down, we all want to be The One who was right. We all suffer from the Jesus Christ complex to a certain extent, also known as the Moses complex. Hollywood has made billions of dollars exploiting this human desire in movies. Man makes claim contrary to the crowd. No one listens. Man screams it from roof tops. No one listens. They start mocking him, laughing at him, and persecuting him. Reality changes to reveal man was correct all along. Everyone apologizes and bows down at his feet and worships him.

As traders, we have to realize that the market is not the Bible, or a Hollywood movie. We have to realize that we all have a deep need or desire to be right, to go contrarian to the crowd. We all have a deep desire to be the one who predicted the next down leg, the next up leg, the next bear market, the next bull market, and so on. The counter trend strategy is a fool’s game to play and if you exercise your inner emotions and desires onto the market place, you will eventually lose all your money. Beginners love to trade against trends (“let’s buy, this market can’t go any lower!”), but most get impaled on a price spike that fails to reverse; “let’s sell, this market can’t go any higher!”), but most get knocked out too early on a head fake to the downside. As my teacher, Dr. Alexander, once taught me, “A man who likes peeing against the wind has no right to complain about his cleaning bills.”

Now that’s not to say that someone who is a contrarian will always be wrong. Statistics show that the best contrarians are right about 40% of the time. Those who use Dine’s “a trend will continue until the trend actually ends, on days a stock trades sideways, assume continuation of the previous trend” are right about 70% of the time.

But in the end, you must decide for yourself. Watch Adam’s video and leave your comments or opinions below.