The Art of Not Fighting the Tape

In trading, where the only constant is change, the adage “Don’t fight the tape” is a good one. That simple principle is profound but sadly often underestimated. As someone who has navigated the turbulent waters of options trading, I’ve come to appreciate the elegance of this trader idiom. It’s not just advice; it’s a survival strategy if you want to outperform the market in the long run.

Think of the market as a river—because sometimes it kind of is. It has its own flow and direction. Attempting to be one little fish and swim against this powerful current is a fool’s errand, for sure. Maybe a better analogy is a cat trying to do it. Sure, it might paddle a bit, but it’s not going to enjoy the process, and neither will you. The tape, or market price action, is your guide through the complexities of trading. As they (also) say: “The trend is your friend. “(Well, unless you’re a cat trying to swim, but I digress.)

Let’s address what fighting the tape actually means. Basically, it’s when traders position themselves contrary to the prevailing market trend. It’s kinda like the financial equivalent of believing that a spoon can be an effective tool for cutting steak. I guess it’s technically possible, but it’s a lot of pretty unnecessary effort and, well, potential disappointment, too.

Why do some traders insist on fighting the tape? Sometimes it’s a mixture of overconfidence and a misinterpretation of market signals. But other times it’s the hubris of trying to “buy the dip”—the dip that never comes. Good investing involves understanding the underlying momentum and positioning yourself to ride the wave, not get swallowed up by it.

Recognizing the underlying forces is key. In the case right now, it’s the massive power of AI. Recognizing what’s going on doesn’t require a crystal ball or arcane financial algorithms; it’s about paying attention. The tape tells you where the market is heading, through price action and volume. Then we just read the news to see what justifies it. A trend is the path of least resistance. Positioning your trades in alignment with this path increases your odds of success, turning the market’s momentum into your BFF.

Watching trends is key in any market situation, in addition to the monstrous up move we’ve seen lately. For example, imagine you’ve identified a stock with strong fundamentals, poised for growth, yada, yada, yada. However, if the stock has been falling, or if the broader market sentiment is bearish, it might be prudent to wait for the tape to reflect a more favorable environment before jumping in. This is an edge in and of itself—get as many factors on your side as possible, fundamental and technical. It’s not about changing your thesis; it’s about choosing the right moment to attack.

Let’s not forget, the market is a formidable opponent, and it doesn’t take kindly to hubris. Traders who fight the tape, driven by a belief in their ability to outsmart the collective wisdom of the market, often find themselves on the losing end. It’s a humbling experience, akin to a reality check, reminding us that the market’s power is not to be underestimated. Nay. It is not.

In conclusion, “Don’t fight the tape” is more than just a catchy phrase; it’s a cornerstone principle for investors and traders alike. It encourages us to respect the market’s direction, harness its momentum and make calculated decisions. The tape doesn’t lie; it’s an aggregation of all known information reflected through price, turned into a force by the buying and selling of market participants. By aligning your trades with the market’s price action force, you’re not just avoiding momentum opposition; you’re leveraging the collective force of all the minds in the market to be on the same side as your investments. Now that’s power.

Remember, the goal of investing or trading isn’t to prove how clever we are by going against the grain. It’s to make profitable decisions. And a key force to put on your side is in acting in harmony with the collective mind that is the market. So next time you’re tempted to fight the tape, remember that sometimes the best move is to listen, learn and let the market lead the way.