In stock trading, you are up against the sharpest minds on Wall Street. To get ahead, you need an edge.
Insider trading is illegal, although still widespread.
Access to Information
Institutions enjoyed that advantage for decades by getting advance warnings from company executives. Reg. D put an end to that.
If we all get the same access to the same information more or less at the same time, then it's the speed at which we react to it that counts. The edge is in beating the others to it - by a day, an hour, a minute. That's where trading seems to be heading: faster execution, lower commissions, more sophisticated online order entries.
There is only one problem: when something gets too crowded, it leads to diminishing returns.
"Dogs of the Dow" was a popular strategy in the 90s. Why bother with anything else when you can outperform the market by buying the top 5 or 10 highest yielding Dow 30 stocks? Once a year, or once a quarter, you roll your money from the winners into a new batch of "dogs." A lot of people did that. Every major brokerage firm rolled out its own version. Now every month somebody was rolling money out of their winners into the current dogs. The end result: the strategy stopped working, and the Dow turned itself into an underperforming dog for years.
You can't beat the crowd by running with it. If you want an edge, you have to look where nobody else does.
Despite what they teach you in school, not everybody can be above average, not everybody can be a winner. Trading is a wealth transfer mechanism where money flows from the many to the few.
Betting against the crowd, not with it, will give you that edge. It does not necessarily mean being a contrarian and zigging when everyone else is zagging.
Many proven trading systems insist that you never lose more than 10% on a trade. When a lot of people started following that rule, a stock declining 10% would trigger an avalanche of stop sell orders, causing further decline. So CANSLIM now suggests cutting your losses at 7 or 8% to be out ahead of the crowd. But now CANSLIM has gotten so popular that more and more people are following the 7-8% sell rule. The result? The selling avalanche now starts earlier but subsides before it reaches 10%. Your best bet is to either cut your losses even sooner (which happens more often) or put the stop back at 10%, avoiding getting stopped out of an advancing zoomer altogether.
So if most traders trade off an intraday, 3-day or 10-day chart, it may make sense to take a longer perspective. Most zoomers' runs last 2-4 months. By accepting a little more fluctuation, you increase your chances of bigger gains while minimizing short term trading.
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