One of the more intractable trader behaviours is the inability to let go of something that was once a good idea and which no longer is. I have spoken before about the desire of traders to cling to legacy trends in the vain hope that the glory days for a particular instrument will return. In part, this somewhat destructive behaviour is masked by the somewhat technically sounding term of buying the dip. This is the strategy of buying instruments that are falling in the hope that they will bounce from the point at which you bought them. Unsurprisingly there is a degree of narcissism in such trading as it implies that you either have special knowledge about the market that no one else has or the market recognises the brilliance of your buying and decides to go back up.
I have returned to lithium simply because it is like a flame to a moth – traders simply cannot resist its allure. If we look at the latest price of lithium we are left with only one conclusion. At present it is stuffed.
The chart below looks at the relative performance of a sample of lithium-based stocks.
The extreme level of outperformance that can be seen during the boom is quite apparent as is the collapse from their peaks which is continuing.
This raises the question of how to avoid such situations and the answer is relatively simple – trade with the trend and not against it. The first step is to learn who is in charge of the market at the time you are considering your trade. The chart below is a weekly chart of PLS with a medium length moving average applied. The style of moving average and its length are irrelevant – all you need to have is some form of mechanism that tells you when the price has been trending up and when it has been trending down.
The rules are simple – you are a buyer when the price is above the moving average and a seller when it is below the moving average. The rules of trading are simple the execution is often excruciatingly hard.