You Can’t Force Love. Or a Good Trade.

With my daughter needing a ride to and from camp last week, I worked remotely from a little downtown café during the a.m. hours.

The place is called The Sun Shop. And I’m grateful for their tea, bagels, Wi-Fi and bathroom. But mostly their bathroom.

Let’s just say the writing was on the wall there, so to speak. I’ll spare you the details, but one piece of graffiti alluded to “not forcing love,” among other things. And that got me thinking.

It’s easy to see that forcing love is not love. Love is truly love when it flows out of you freely — uninhibited by selfish desires, ulterior motives and misguided expectations of fulfillment.

Then there’s unconditional love, the only two sources of which are your dog and its semordnilap. (Hint, read both words backward.)

But then, when I sat down pen my weekly correspondence to you, I thought of the toilet philosophy at the café.

Take out love and put in “trading.”

If you have to force a trade, it’s probably crap.

Trust me — I know.

And so does Jeffrey Gundlach.

In Pursuit of Good Trading

I spent more than a decade honing a trading system I could put my confidence in.

That included whittling down indicators, price measuring tools and trading patterns until I was left with the bare minimum. But arriving at a minimally sufficient selection of technical tools was not and is not the exclamation point on my system.

In fact, there is no exclamation point. There is no period. There is no end to this pursuit.

Because even when the process of elimination is done and you have a set of tools you like, the rest of the system depends on cultivating and maintaining a trader’s mindset.

A trader’s mindset is inherently complicated. It is a manifestation of human nature intent on putting a box around human nature.

But there are some basic concepts that can aid the pursuit.

Off the top of my head:

 Know yourself.

 Know what you only think.

 Know your risk.

For starters, it’s critical to understand how you respond to making and losing money. If you are susceptible to getting greedy, how will you rein that in? If you scared of missing the bus, how will you prepare for those situations? If you are fearful of losing money, why?

I say all this because your response mechanism — YOU — must work symbiotically with your technical tools.

Whatever that looks like, it must do at least one thing well — it must let you establish your willingness to lose a predetermined amount of money.

In other words: It must help you know your risk.

But let’s think about what we know we think.

Should Just Doesn’t Flow

It’s too easy to get caught up in fundamental narratives.

We have an innate desire to be right. And in chasing that rabbit, we often confuse what we think with certainty.

But the moment we feel we know what should happen, we betray our system.

Remember: Our system, if it has any credibility, is built around revealing the human nature that drives prices. This human nature explains why we think we know what we merely think.

For example, I’ve been short U.S. Steel (X) in recent months. It’s not going well, even though overcapacity in China suggests steel prices (and shares) should not be going up.

As another example, Jeffery Gundlach of DoubleLine Capital fame, has been handed the throne of “Bond King” once held by Bill Gross.

Not too long ago, Gundlach became bearish on the markets. He’s recently become more bearish, specifically so on bonds — suggesting the hunt for yield in bonds is a sign the market is suffering from mass psychosis.

His rationales are rational.

And his rationales are pretty consistent with others bent on figuring out what should happen to markets in a world of financial system insanity.

Yet U.S. averages are making new all-time highs.

European bank shares have suffered amidst Brexit fallout and Italian banking woes. But the levels of pessimism there are reminiscent of a time in the recent past — July 2012 — when European banks were so hated that their shares proceeded to rally 90% in the 20 months that followed.

Certainly European banks should not have become beneficiaries of investor capital flows … not when they were so at risk of insolvency and systemic pressures.

By the same token, should U.S. averages be rising to record levels now … when growth is limited to and by debt as far as the eye can see?

Well, we probably should not care.

Last week, in this column, I suggested we might be looking at an opportunity to buy into the iShares Europe ETF (IEV) if such a destination suits you. Same line of thinking for the iShares MSCI Europe Financials ETF (EUFN) in the chart above.

But let’s get back to Gundlach …

His bearish narrative suggests a couple things:

 Interest rates on bonds should rise because their persistent suppression is indicative of mass-market psychosis.

 Equities should break down from their fresh all-time highs.

 Crude oil should break below $40 per barrel before, and if, it is to break back above $50.

It’s hard to disagree, except when you know that the rationales for these predictions are based on things we think rather than things we know.

After all, should oil have risen from $33 per barrel to above $51 per barrel this year?

The narrative said no way.

But the market said otherwise.

Fortunately, I trusted my system on that crude oil trade. I went long. Perhaps more importantly, though, I didn’t go short based on what the fundamentals suggested should have happened.

Gundlach may be proven right in the near future. But not simply because he should be.

If you’re looking to get short crude oil … or short U.S. Treasuries … or short U.S. equities, just make sure you’re not forcing it.

Trust your system. Know what you know and what you don’t.

Then let it flow.

Do right,

JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also …