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.