6/24/10 Purple Haze/ Trading Ugly

Purple haze all around
Don't know if I'm comin' up or down
Am I happy or in misery?
Whatever it is that girl put a spell on me

I read a few comments today that strike at the heart of trading- making the counter-intuitive move is almost always correct.

Why is that?

Unlike investing (where it's entirely possible for all players to make money owning 'title' to 'assets' that appreciate due to value creation over time), day trading is a zero sum game- one wins at the expense of other players. It's simply not possible for everyone to sell at the highs and buy at the lows.

So we're all gaming each other. Once you recognize that profits are made at the expense of the 'crowd,' it becomes clear that you must fade the crowd.

The crowd has a strong tendency to make the wrong move, as humans are wired to think they're above average (recall the oft-repeated 'experiment' where a professor will ask how many in the room think they're in the top 50%, and invariably way more than half the students will raise their hands).

Next time you feel 'adamant' about opening a position, ask yourself how strong the tendency is. The stronger it is, the more likely other traders will feel the same. In fact, it's very likely an entire 'crowd' of traders will act in concert on the almost irresistible instinct to buy or sell, as the case may be. Your job is to sense the momentary urge to do the same, and recognize it for what it is: the signal to fade the crowd and take the (usually) uncomfortable opposite side of that trade.

Therein lies the 'secret' to making money. Make the 'ugly' move.

It probably also explains why trading 'under the influence' may actually improve your performance. It certainly explains why I did so well in 2009.

Juuust kidding.

Next time you're in a purple haze and feel the Market has put a spell on you, remember to trade ugly.