Trade Ideas Blog
Make the Market Work for You
Oct 6, 2009
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 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.
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.