Keeping It Simple: Why Short Traders Are Losing Money This Week

 

NEW YORK (TheGoldAndOilGuy.com) -- One thing I have talked about several times is the tendency for investors to believe that complex trading ideas and automated trading systems are better than simple, logical ones.

At first thought this notion is completely understandable. After all, if an idea is fairly simple, how could it possibly be "a secret" and investors not using it yet?

Successful trading and investing is not about how good you look or how impressive you sound in videos. It's about what, when and how you do it. It does not matter if you are placing the trades yourself or using an automated trading system. What, when and how the investment is traded is all that matters.

It's known that highly intelligent people struggle with the markets because they believe intelligence will improve their trading results. The reality is, they do not think simple trade setups and strategies that look like they will make easy money will work. Why? Because they think that the market is complex and thus trades should not be simple to spot and time, therefore the simple ideas should not work.

In all fairness "simple trading" is not really that simple. Successful trading requires the right kind of simplicity, in the right amount at just the right time. This is what creates the highly profitable investors and automated trading systems.

Why are short traders losing money this week? Because they are fighting a bull market which is still pointing to higher prices.

Take a look at the chart below of the S&P 500 futures index. You will notice the bars are color coded. This is done by my automated trading system that identifies the market trend which trades should be trading in line with.

The stock market remains in a full-blown bull market. Investors should remain long for time being. On the other hand, active investors should be trading with the current market trend shown on the chart.

Market corrections within a bull market are sharp and short lived. As an active investor you will be lucky to catch one or two short trades during these pullbacks before the uptrend is retaken.

It is important to know that eventually one of these bull market corrections will be the straw that breaks the camel's back, and kick-starts a new bear market. This is why I always move to cash and look to short each of these corrections. We just never know when a full-blown bear market will start.

If you are holding your positions through these corrections and think you're a great investor, just wait until the market does break down and most of your gains are gone before you realize it. I will admit, it's very easy to get lazy with investments after years of rising prices. Laziness and a the lack of a trading strategy for a falling market is what causes 99% of investors to lose their money.

I believe in trading defensively. Sure it's more work, takes time to follow and there are extra trading commission fees, but it's a small price to pay to keep the majority of your gains.

Automated Trading Systems & Corrections

 S&P 500 Monthly Big Picture Analysis

Here is the big picture and trend of the S&P 500 index. Simple fact is, eventually things are going to get really ugly. By stepping back and looking at this chart, it's clear the market must still fall substantially in value to break below its critical support trend line and before we can confirm a true bear market is in place.

Do you want to see your nest egg drop 20%-30% before you decide to exit? Or do you want to profit from this initial correction when it does happen, and make even more money when the stock market drops for a year or two after taking your account to new all-time highs.

Automated Trading Systems Big Picture

Keep It Simple Conclusion: Automated Trading Systems?

The good news is that if you keep things simple by following the intermediate trend, like the color-coded chart above, you can keep making money as the market rises to ridiculous new highs, and avoid market corrections, and possibly even profit from them.

In my next article I will show you a simple trading strategy that I have used for many years to time stock market bottoms and tops for swing trading. Best part is that the data I use is available online for free.

One final note: there are automated trading systems that do all this for you. I use it and have it trade my own investment capital for me. 

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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