Trading What You See

• Posted by Robert Sinn
• on May 2nd, 2012

You’ve probably heard and read a lot of traders talking about “trading what they see”, what does this mean? After all, what you see are market movements including a great deal of noise and meaningless short term fluctuations. Some will even argue that trading what you see can’t possibly derive any edge because it is stale information the millisecond after you have seen it. Today I would like to offer a few examples of the value and the pitfalls of “trading what you see” in the equity markets:

On a Friday morning three weeks ago I noticed the unmistakable signs of institutional distribution in the $AAPL chart and I tweeted the following comment on StockTwits:

Although I do not trade AAPL very often I was able to determine that longs were now in serious jeopardy simply by what I saw in the chart. Since that day AAPL shares have been fairly volatile, however, even after reporting blowout quarterly results the stock has spent the vast majority of the last three weeks trading below where it was on April 13th at 11:20am:

 

Although I wasn’t short AAPL at the time of the tweet on April 13th I knew that I certainly did not want to be long the stock. Another example of trading what you see comes from $BKS which recently received a large investment from $MSFT causing the stock to gap higher by nearly 90% on Monday morning – last week’s action in the stock screams “do not be short this chart!“:

 

Of course, trading what you see doesn’t always work out due to the wide variety of false and misleading signals prevalent in markets – heading into last Tuesday’s earnings report AAPL didn’t give market participants much to see in terms of bullish action:

 

You can replay some of the CNBC comments and tweets from last Tuesday but i’ll give you a hint: Not many had positive things to say about AAPL before its quarterly earnings report. Sure enough, AAPL reported blowout numbers and was quickly trading north of $600/share in the after hours trading session.

In summary, trading what you see is an important skill which will occasionally lead to great trades but more importantly it will keep the trader away from making really terrible trades such as buying a stock that is under heavy distribution or shorting a stock with an explosive chart setup that has exhibited strong signs of accumulation. Perhaps the most important lesson to glean from the axiom “trade what you see” is to first and foremost avoid trading on ones opinion or expectation of what “should” happen. Holding firm to opinions and/or expectations of the future are poison to a trader’s mind.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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