Tuesday, September 22, 2009

Reverse Engineering Trading Failure

Many of the best daytrading opportunities, I find, come from situations in which a large number of traders are caught leaning the wrong way in a market. (See this post for an example). They are leaning the wrong way both in terms of direction and timing: they're selling, for instance, but not able to push prices meaningfully lower. They're also selling at multiple periods, expecting markets to trend, but never getting the breakout move. The combination of these dynamics create ranges in which the eventual breakout move is amplified by traders needing to cover positions once it's clear they've been leaning the wrong way.

Those dynamics also create false breakout moves that wind up being good "reversion" trades. (See this example as well).

If, as trading lore and research has it, 80% of traders lose money, might it be worthwhile to isolate what they do wrong and figure out how to profit from it? That's my latest project.
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5 comments:

tristan said...

Know your market is it mean a mean reversion market ie spread .

Good work DrB as usual.

Fader

BalaB said...

My single most favorite trading "tactic" came from that very same situation (along with an alternative adaptation to market context).

Matthew C. said...

Excellent thoughts Dr. Brett.

I picked up a half dozen or so ES points today just fading the highs and lows when the wannabe trend traders bailed their positions en masse. Easy low-stress trading, just waited for the breakouts / breakdowns to fail, then climbed on board for a point or two each time. . .

ESniper said...

Me thinks mkts tend to move in the direction that causes the most pain.

So why is it that most traders fail to properly respond to this pain and change their "behavior"(i.e. strategy)? Or is it that most traders, getting caught on the losing side too often, simply blow their accts up before they are able to effectively adjust?

Is there a trade setup anywhere in those questions? Something to ponder...


charleS

JYY said...

Almost any decent day trader knows that days like today fading the highs and lows has a very high odds of being winning trades.

Does it not make people wonder what's the driving force behind the price movement to the extremes of the range and rationale behind it? There can't be that many incompetent traders waiting for a breakout.