One of the biggest mistakes traders can make is thinking they must have a view on the markets.
They feel the need to be either bullish or bearish. And once they’ve decided, they view every piece of market action through that lens.
But markets are rarely that simple…
While markets can rally strongly or fall sharply, there are also plenty of times when they’re rangebound and heading nowhere. They bounce between support and resistance while traders wait for the next major move.
Each of these environments is different. But each one can offer plenty of opportunities with the right strategy.
Viewing markets solely through a bullish or bearish lens means you’re going to miss out on a lot of those opportunities. And that’s not the only problem…
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Once traders develop a strong market view, they can become emotionally attached to it.
Instead of responding to what the price action is telling them, they start looking for evidence that confirms what they believe. Anything that might contradict that view gets ignored or explained away.
That can be especially dangerous in a market like we’re trading now.
Treasury yields are flirting with multiyear highs, while oil remains elevated amid the ongoing conflict in the Middle East. That combination has revived concerns around inflation, while Federal Reserve Chair Kevin Warsh’s hawkish comments at Jackson Hole strengthened the case for a rate hike.
Put those factors together, and it’s easy to take a bearish view for stocks. But the market doesn’t care about our opinions.
A bearish backdrop doesn’t mean every stock has to fall. Even if the broader market trends lower, there can be powerful counter-rallies along the way. Those countermoves can provide some of the best trading opportunities.
The same applies when markets are rallying. No matter how bullish the environment appears, investors eventually take profits. Stocks become overextended, and momentum gets stretched. Short-term traders start looking for an opportunity to fade the move.
That’s why I don’t begin with whether I’m bullish or bearish. Instead, I focus on one key question: Where’s the opportunity?
That one clear distinction sits at the heart of how I approach the markets.
Rather than trying to predict what a stock will do, I look for trades offering the strongest setups. That could mean identifying an important support (or resistance) level that has held several times before.
And as a mean-reversion trader, I’m constantly looking for markets that have moved too far in one direction. If momentum becomes extremely overbought, I start looking for signs that the move is running out of steam. Or if something becomes heavily oversold, I look for evidence that sellers are growing exhausted and a rebound could be developing.
The key point is that these opportunities can appear in either direction.
That’s why remaining neutral is such an important part of trading. It doesn’t mean being indecisive. It means being willing to trade the setup in front of you rather than trying to force the market to fit your predetermined view.
Traders don’t get paid for having the best opinion. They get paid when they identify a strong setup, manage their risk, and successfully exit the trade for a profit.
So stop worrying so much about being bullish or bearish. Instead, concentrate on finding the next good trade, whichever direction it takes.
Because in the end, the market only rewards you for successfully interpreting what’s in front of you.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
