Yesterday’s drop in $EURUSD highlights the extremely short-term view of many traders in the StockTwits stream

This post is sure to step on some toes…but I have stepped on toes before and I will step on toes in the future. So here goes…

Let me emphasize that what I have to say in this post is not aimed at all participants in the StockTwits stream. There are many excelllent analysts, traders, risk managers and bloggers in the stream. You know who you are from your brokerage statements.

But, the StockTwits stream contains a significant amount of thinking and market manuevers that are — in my opinion — dangerously short term.

Yesterday morning I came into the office to find the $EURUSD down about 200 pips and experiencing the completion of a major bearish triangle. Not being a regular follower of fundamentals, I went to the stream to find out the reasons for the weakness. Within a matter of minutes, here are some of the stream posts I read:

• 1.4015 Long/ 30 stop
• freefall done for now, tempted to long here
• looking extremely cheap
• I believe him EURUSD
• 60min Buy in the dip!  
• traders getting long
• Great bullish pattern on EURUSD, buy on the dip lol… long…

Frankly, I could not believe what I was reading. To make myself clear, I am not against a tradng system that includes a component for buying or selling a market based on a return to the mean from a price that is a certain number of standard deviations out of line. But, this was not the spirit of what I was reading.

Rather, I sensed way too many traders attempting to catch a falling knive because they missed the move down. And to me, this was an indication that the StockTwits stream has many market participants who make a habit of standing in line to pick up nickels when the next line over is handing out dollars.

If you consistenly make money catching knives, all the more power to you. I will never fault a person who has figured out a way to make a living from the markets. But, I strongly believe that such short-term trading is dangerous for many novice and aspiring traders for two reasons.

The first reason is that small miscues, misjudgements, execution snaffus and the like exponentially add up to become major hurdles to success as a trader’s time horizon shrinks. The second reason is that really significant trading profits come from the practice of holding positions and not by active trading. Additonally, the shorter term a trader becomes, the more he or she is competing with sophisticated HFT operations. And, whether a short-term trader uses market or limit orders, they need to know that they are buying at the offer and selling at the bid. HFT operations, in contrast, manipulate the computer trading environment in order to buy at the bids and sell at the offers.

So, if the shoe fits from what I have described, then wear it. If it does not fit, then ignore it. But if you have been standing in the nickel line and are unhappy with your overall trading results, I suggest you move over to the dollar line.

$STUDY

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