Tuesday, October 06, 2009

Make the Market Work for You

Counter Trend Trading: Inviting Your Ego to Trade

Today while trading and discussing trading on Stocktwits, I came across a very interesting article written by Dr. Brett Steenbarger. This article discusses the compulsion some traders have to counter trend trade. Traders who counter trend trade are sometimes called contrarians. The reason I wanted to blog about this article is that when I first started trading this was a mistake that I made often and it was costly.

I want to give a personal spin on what this is like as well as explain when being a contrarian can work to your advantage. Click here for the complete article.

I started trading in the early nineties, using the SOES and Select-Net systems to get in and out of Nasdaq stocks. It felt really good to be doing something that most people could not even remotely understand. It was an ego boost. Back then the high flyers were stocks like DELL, and CSCO, and INTC and my favorite INTCW. We would see the sellers stack up on level II and watch as momentum slowed and just when we thought the time was right we would hit bids, get short against our boxes and look to make a quarter or fifty cents on 1000 shares. It was awesome, especially if you were half way decent. But, as we worked the mechanical magic of trying to get short into the momentum and bid in a quarter later for our $250 dollars we were completely blind to the fact that these stocks were tearing the hell up. There was no sexiness to buying these stocks and holding them, yet at that time that was really all that you needed to do. Our super smart SOES system was state of the art and it made us money, but we lost countless millions in opportunity cost. I was living and trading in Austin, Texas at the time and there were many low level DELL employees driving Ferrari's around all because of their stock options. All the while, we the trading experts, just could not see it. We were blinded by our ego's, the speed, and how cool it all seemed at the time.

The Power of Right Now - Not I'm Right

As I got older I realized that being a good trader had nothing to do how fast I could punch keys, but rather it was about simply making as much money in the market that I was able to make and most of all making sure that I managed my exposure and risk in a way that would allow me to milk a trend but not put me out of the game should something not work out. It is not the stock or the market type I realized that makes you money, but it is how you manage a trade. Many traders and pundits attempt to guess what the market is going to do tomorrow, but nobody knows. You might guess right but you certainly will be wrong at some point. When you are counter trend trading as a habit, you are focusing on being right, you are not in the present, but rather in the future that has not happened.

There is a more scientific type of contrarian trading. This contrarian trading uses the power of statistical analysis as an edge. It is often called mean reversion and in our experience, is most effective when used with an automated trading system. This type of trading requires you to be in several positions at the same time and it is almost impossible to do it by hand. This is where technology really can help the trader. Our automated trading software and our OddsMaker analysis software combine to allow trader to take a quantitative spin on contrarian trading. We have several videos showing this type of trading in action on our YouTube page.

Kick the tires. Evaluate this approach. You'll be a calmer, data-driven trader who only plays the odds as a result.


Anonymous said...

Were you in the Block Trading office with Luf?

Steve said...

Selectnet Swipe Baby!