Sunday, October 22, 2006

Joe Bloggs of Trading


Before the Blogosphere there was Joe Bloggs.

For those of you who remember taking standardized tests to get into college (SAT or ACT) Joe Bloggs is the name of the average American student. He's not an idiot and he's not a genius, he's just average.

On the SAT he scores exactly what the average American student scores. When Joe takes the SAT he gets all the easy questions right, half the medium ones right and none of the hard questions. When you take the SAT, they tell you to keep in mind how Joe Bloggs would answer an easy, medium or hard question. Joe Bloggs always picks the answer that seems right. On hard questions, find the answer that doesn't seem right and eliminate it--that's the Joe Bloggs answer. Why is Joe Bloggs important in trading? Predictablility.

Stay with me.

In trading Joe Bloggs faces a test much more challenging than the SAT. All the questions are the hard ones. Only in hindsight do chart patterns look obvious but when you look at situations in real-time every breakout and every breakdown can look like a good candidate. Most traders learn the savant skills necessary to survive through a painful process of trial and error. That process is an expensive to say the least. Joe stuggles because he is bombarded with information that's difficult to processs.
  1. The trend is your friend
  2. Don't follow the crowd

Easy enough right? So Joe comes across a strategy that he thinks may yield some interesting results. First he is going to look to short stocks, because he wants to make money when the average person loses money. He is going to short stocks that are down big over 2 dollars and he is going to initiate the trade toward the end of the day because he is following the trend. With about an hour and a half left in the trading day Joe starts placing his trades.

Unfortunately, Joe quickly starts to realize that even though all the set ups look pretty good only a third or so move in his direction and he is even more discouraged to find that every winning trade is less than half the size of his average loser. Although Joe tried his best to follow the market advice of going in the direction of the trend and not following the crowd he was dead wrong. Test flunked.

That was a big part of our idea for The Odds Maker. The strategy described above is actaully one that we created to find Gap Up candidates. It occured to us as these set ups appeared on the charts in real-time how tempting they look to hungry short sellers - when actually the opposite is true.

At Trade-Ideas we went through similar situations as traders - the experience helped us design the tools we believe can give Joe Bloggs a cheat sheet to the market. Remember that Joe is not an idiot, and he is no genius - he gets all the hard questions wrong. In the market thinking that you are a genius can be very expensive. Joe just needs a little insight as to what is currently working - and his Odds Maker.

1 comment:

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