Selling Into Strength is Mainly About Reducing Risk – Hedging is Stupid

We’re either going to work hard at this business and succeed, or we’re not. The people who stay mentally tough thru it all, will always survive. It requires working at this every single day, like playing piano. Please take the time to take perspective of your life and decide which choice you will make.

Hedging is one of the dumbest things people do in markets. How do I know? I’ve done it, and learned how idiotic it is.

Selling into strength.

Now you’re talking. Why not just sell into strength, and buy back into weakness. You think you’re that good to be able to pick THE TOP? Unlikely – very unlikely. But if you spend a LONG TIME honing a method for being able to recognize the PROBALITIES that a top (THE TOP?) is near – then that can work beautifully. Thus selling into strength, and buying back into weakness – awesome. And I am not just pontificating about this (I hope) – I absolutely put this into practice in the real world (implementation) – over and over. And below are some intraday messages I’ve left about it’s time to sell:

 

From 1/15, as the miners were rallying, I was already looking way ahead, and explained what I would be doing (not may be doing, hello rear view mirror analysts) when gold gets to 1360. And yes gold did, and I did – and it’s up to you to learn what a true top looks like –  learn 123 tops, like GDX:

From 1/15:

The $ at new lows, as I’ve been talking about, and PMs rallying. A quick spike into 1360, and I am cutting back. A slower rally, and a BACKUP before 1360, I may hold. Or even do a leveraged trade if there is (for me) a 123 reaccum and/or absorption. In the case of a spike I’m selling FNV. It has been a superb performer during the previous 56 months (the accumulation in the overall miners). But that is part of the problem, gold itself will continue to give more “evidence” of what we’re closing in on, and there will be a better way to approach this. Possibly adding on to GOLD (Randgold) into the next bigger reaction.”

Is this business easy? H… no. I work extremely hard at this business. Hard work costs nothing, anyone can do it, but few do. On 1/24, I left this intraday comment:

 

“….I sold FNV today at 78.30, sorry to see it go. I do believe GDX has a good shot back to 25.70, but i’m starting to sell….“:

 

 

 

 

So you see my preparation there, and my plan, and yes I follow thru on my work, so done, done, done.

 

Another example, I was bullish on pot stocks for several months, but they had had a HUGE run, and the whole world (almost) was wildly bullish on them, and on 1/9, the very high day, I left this message, the original chart included, and below:

The pot stocks are WAY overdone. I have been saying that they are not currently a market to invest in (for me). Only to trade. I sold most of my remaining CANN position. Here is the explanation.”

 

 

And since 1/9, pot stocks have gotten clobbered – clobbered – down 50%+:

Do you think it was at all easy to recognize that top? Not at all. But what I did know was the PROBABILITY that a top (THE TOP?) was close. How? Via the 123 top, that’s how.

So hedging at a top? Pure lunacy. Just sell into strength. Why do people want to complicate this, it’s already a struggle – every day.

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My view of hedging:

My view about hedging is that for virtually everyone, including me, it is a completely stupid concept. If you are long a position (ABC), and you’re concerned about it, then just sell it. In other words, if someone feels they are that adept to “be concerned” about a position, then what does that imply? It’s a top. If something falls from where it is currently, then isn’t that a top? At least some kind of top? Yes. So if someone is that “prescient”, then why not just sell? Doesn’t that make sense? This business is probabilities, not predicting and/or certainties. And if it is probabilities, then maybe you’re wrong, and it’s not a top.

So instead of selling, you “hedge”, you short something (DEF), or you buy puts, for instance. Let’s look at that. If you short something as a hedge, which is the dumbest idea, well what does that accomplish. Remember, pure probabilities. So ABC keeps going up. Well great, you kept it and it keeps rising. Awesome. Oh wait, you’re also short. So no, you make nothing from the rally. Not only that, then you’re stuck with a DEF short. When do you cover? And you’re still long ABC, so when do you sell? And this is maybe the most absurd part of this, most people then cover the underwater short position right when they should have put it on to begin with. Meaning, they should just have sold ABC there. And in the meantime, you are totally confused. Trust me, I’ve done it.

OK, so instead you buy puts. Great. Your position in ABC goes down, so you make money on the puts. Oh wait, you lose money on the long. Then your focus is, dang it why didn’t I just sell ABC to begin with. Then when do you sell the puts? I’ve seen this one over and over. You don’t sell the puts for a profit as a “hedge”. And then ABC starts rallying, goes to a new high (123 top?) and you get out of the puts (sell) for a loss, right when you should have just sold the stock and/or bought the puts. I could go on and on about how stupid hedging is – it is as dumb as all the market theories out there, like “gold soars when the stock market crashes”.

To repeat:

Selling into strength

Now you’re talking. Why not just sell into strength, and buy back into weakness. You think you’re that good to be able to pick THE top? Unlikely. You use the awesome method of spending a LONG TIME honing a method for –  selling into strength.

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About traderscott 850 Articles
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day. Scott returned to markets over fifteen years ago where he continues as an independent trader.

5 Comments

  1. Always thought I was stupid because I couldn’t understand a reason for hedging, thinking a hedge fund might consider tax implications or losing a large position?

    • No you were way ahead of me. It took me totally screwing up positions to finally figure out how absolutely stupid the whole idea of hedging is. Why? Again it’s about time-frames, too confusing for me. The best “hedges” in the world are to be long the uptrends (from an outstanding entry point) and (maybe) short the downtrend markets (from an outstanding entry point). And also, to sell into strength, cover into weakness, take our profits and wait for the next trade. We have got to make this “simple”. And yes billions in capital may think taxes, but then look at their performance in general, and if the focus turns to taxes, we’re cooked anyway, we’ve lost the point of trading.

  2. So on your CANN chart what denotes the 123 top?

    There are four green arrows. Are you starting with the first one on the left or the second at the actual top with the volume peak?

    I apologize if I am asking dumb questions, but

    I am determined to get this down!

    • The first green arrow, I think 7.50, is EA #1. That is what sets up everything, begins the count (for me, just the way I do things). So on 1/9, when I said time to sell, I believed we were at #3, just my view at the time, worked out beautifully, but it’s just probabilities. Lastly, remember with EA #1, buying into that selloff is (along with the mirror image at a bottom #1 EA) the single highest probability trade I know. It is the reverse of what happens at the bottom, meaning the short sale setup into the rally after the #1 EA low (preliminary support). Just look at this week in the indexes – the top on Wednesday morning, as David pointed out, that was the mirror image of an overall top. Meaning the PS, the bounce, and the next selloff to new lows. Super high probability short sale setup – any market, stock, just know the time-frames.

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