Sunday, January 31, 2021

Lessons From The Recent Trading Craze

Aristotle had a good point:  Without a touch of madness, we would all be secure in our consensus thinking and that's not helpful for innovation.  Often, it's the seemingly crazy question that leads to new ideas and fresh ways of tackling old problems.  For a long time, algorithm developers have been able to examine individual transactions, volume, and price levels and estimate how much volume is long and short at various points in the market.  At key points, these programs can push prices beyond a pain point, forcing shorts to cover and longs to scramble from their positions.  Figuring out where buyers can't push prices higher and sellers cannot move markets lower is a durable source of edge, in part because market participants tend to be leveraged and cannot take heat on their positions.  

So along comes a touch of madness saying that this same dynamic could be implemented by large groups of traders aligned in social networks.  Some large market players specialize in short-selling strategies, seeking to profit when individual stocks are overpriced.  They then leverage bets that these high flyers will return to earth.  But what happens when networks of individual traders take the other side of that bet, pushing prices higher than the short sellers can bear?  The result is that overbought stocks become insanely overbought, but over the short time frame the inability to take heat has created yet another trading edge.

You don't have to be a whale to dominate the seas.  Piranha in sufficient numbers can take down the largest creatures.  It just takes the madness of a few lead piranha to see what can be possible.

Ultimately, markets will absorb the participation of trader networks as they have absorbed the participation of computers:  through regulation and oversight.  But I'm not sure the genie gets back in the bottle once unleashed.  Networks are likely to be here for good, introducing elements of madness in politics and finance, sometimes for better, sometime for worse.

The untold story is less dramatic, but perhaps more important.  I have record numbers of traders reaching out to me, interested in learning trading.  They are not simply wanting advice on $GME or $AMC; they truly want to learn how to trade.  The current market turmoil is bringing an entire new generation into markets, and that will shape market activity for years to come.

The opportunities are immense for trading firms dedicated to training new traders, such as the groups I work with at SMB Capital and Kershner Trading.  They are also profound for online trading communities that are truly dedicated to teaching trading and growing a new generation of market participants.  Take a look at Investors Underground, with its trading courses, video library, and real time chatroom for developing traders.  Take a look at Traders4ACause, with its annual programs and networking events.  Take a look at BearBullTraders, a community of mentors and training resources that is in the process of teaming up with TradingSim, developer of a platform where traders can actively practice trading skills.  

As responsible and successful trader development networks take hold, they will change the face of trading psychology.  The emphasis will be less on one-to-one meetings and more on group programs that teach concrete skills specifically tied to trading practices.  Each network will have its own curriculum and its own group of experts to provide that curriculum.  Trading networks will look far less crazy and increasingly look like professional training platforms: next generation vehicles for the development of market participants.

I recently offered a simple three-item checklist that traders can use each day to ensure they are performing at their best.  In a networked trading world, the goal is not for people like me to coach traders.  It's for people like me to provide resources that enable traders to coach themselves.  Once you have your checklist and a robust process for utilizing it, you can take control of your own development.  The goal is not to find the next bright shiny object to chase in the trading world.  The goal is to find within markets your strengths and your interests and learn how to guide your own development, your own heroic path.

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